The DeFi Edge: 14 Mental Models That Help Crypto Investing

Note: On July 16th, crypto big V The DeFi Edge shared 14 mental models that help crypto investing and common investing pitfalls. The following is compiled by The Way of DeFi.

The DeFi Edge: 14 Mental Models That Help Crypto Investing

Warren Buffett and Charlie Munger used mental models as an advantage to become the greatest investors of all time.

There are hundreds of mental models, and here are 14 (including common investing pitfalls) that will help you become a better crypto investor.

First, what is a mental model?

Mental models are concepts that help us better understand the world. Your thinking is limited by your own experience and biases – mental models are a way to gain wisdom from an entire field.

Knowing them will help you think more clearly.

Cockroach Theory

When bad news comes, more negative events may come. Seeing a roach means there may be a nest of roaches hiding.

If a company releases bad news, keep in mind that they tend to hide more to buy time (like Celsius did).

When Terra Luna and $UST crashed, we knew it was bad. But many underestimate the extent of the contagion. Subsequently, other roaches like Celsius and Three Arrows appeared.

Whenever there is negative news, be prepared for more of it.

Three become tigers

There is a Chinese proverb that says that as long as enough people repeat an absurd message, people will tend to accept it.

Imagine what you would think if there were rumors about tigers?

  • 1 person: liar
  • 2 people: is this true?
  • 3 people: There are tigers!

It’s not just 3 people now, imagine what it would be like if thousands of people shared on social media. Combined with bot traffic and economic stimulus, it’s easier than ever to spread misinformation.

So, always be cautious about rumors without any facts or evidence.

inevitability of behavior

Human behavior and its biases will always be there.

“History never repeats itself; but human beings always do”. – Voltaire

It’s interesting that some books written thousands of years ago still feel so relevant today.

(Aurelius’ Meditations)

I will apply this thinking to the next cycle.

Humans are greedy.

  • Will there be more real-world adoption? Yes.
  • Will there be better technology in the next cycle? Yes.

But will there be Ponzi economies and cult leaders again? Yes.

Acton’s Law

“With power there will be corruption, and absolute power will lead to absolute corruption”.

During this cycle, many major figures in the crypto space collapsed, including Daniele, Andre, Do Kwon, Su Zhu, etc.

Be wary of powerful figures — because most people can’t handle power and will abuse it.

Brandolini’s Law

The energy required to refute bullshit is an order of magnitude greater than to create bullshit.


  • Write a post about Luna/Anchor and get thousands of likes.
  • Writing a post critical of Luna/Anchor invites enemies and harassment.

Same with those Node projects. Every cycle, there are always cult projects, and it takes a lot of effort to fight them.

Unknown unknown factor (black swan)

Known unknowns — risks you know about, such as smart contract vulnerabilities.

Unknown unknowns — those unimaginable risks, you can’t possibly see them coming.

For example, the 9/11 attacks, the COVID-19 pandemic, or the collapse of the 3 AC.

We tend to underestimate the impact of black swans.

Diversification helps guard against these events (and that means diversifying outside of crypto too).

Imagine the occurrence of rare events and their impact.

  • On-chain activity in Satoshi Nakamoto’s wallet
  • nuclear war

Pareto Principle

The Pareto Law (the 28th rule) states that 80% of the consequences come from 20% of the causes. It was proposed by Vilfredo Pareto, who pointed out that about 80% of the land in Italy is owned by 20% of the people.

This applies everywhere.

  • 80% of revenue is generated from 20% of agreements.
  • 80% of the profits generated among all traders come from 20% of traders.

network effect

A product becomes more valuable as more users join it.

Think about how much Facebook would be worth if no one was using it. It will even be more useless than it is now!

Once a company has network effects, it becomes an economic moat that is hard to beat by other companies.

When you invest, consider which protocols are positioned to gain network effects.

For example, there are quite a few people trying to build a decentralized social network.

Due to network effects, only one person can win.

Lindy Effect

For things that perish naturally, each additional day of life shortens their life expectancy a little, but for things that do not naturally perish, each additional day of life means a longer life in the future.

It’s hard to say which coins will still exist in 20 years, but there is a good chance that Bitcoin and Ethereum will.

So they are the safest investment bets.

Lindy Agreement.

I have lost count of how much money was lost due to DeFi hacks and exploits.

Therefore, if you are going to pledge assets, choose more Lindy protocols such as Aave and MakerDao.

If they were hackable, it already happened.

self-protection mechanism

Pain and fear are an integral part of all living organisms, and self-preservation is an act that ensures survival.

I don’t believe in the concept of 3,3 or “HODL”.

When things get tough, people always put themselves first.

control center

It’s a phrase from chess — it means control of a valuable space or resource.

  • Streaming companies are fighting for content.
  • The world fights for oil and scarce resources.

Identify valuable resources and the players who compete for them.

We saw this in the Curve wars.

Stablecoin liquidity is a valuable resource and we see protocols fighting for CRV/CVX tokens.

In the future, what will be the precious resources that the protocols will compete for?

second-order effects

Every action has a consequence. These consequences have secondary effects.

Most people only consider the immediate impact and see no other impact.

When something happens, think “Then what?”

I always think about this every time the protocol makes changes to the token design.

Here is an example:

One protocol wants to reduce the amount of tokens released to slow inflation.

What are the possible second-order effects?

  • Lower release means lower APR
  • A lower APR means less usage and liquidity (because there are less incentives to reward).

People will leave unless there is sufficient utility or other incentives for the agreement.

Think about decisions and place them in different timelines.

Let’s say I ate a cheeseburger

  • The moment (yummy!)
  • 1 week (gain a little weight)
  • 1 year (this habit increased my cholesterol)
  • decades (heart attack)

We are not good at long-term thinking.

take advantage

You’re riding the wave, spotting and capitalizing on a trend early on.

  • Amazon caught the internet wave early on.
  • Netflix started out with mail-order DVDs and then switched to streaming because they saw the wave coming.

You need to identify trends early, ride them as best you can, and get out before it stops.

In the field of encryption:

  • Find a trend early (spot wave)
  • Invest in it (ride the waves)
  • Earn profits along the way. (leave before the tide subsides)

First-mover and second-mover advantage

A protocol may have some advantages before it enters the market. Whether through brand awareness, switching costs, or early purchase of resources.

In addition, there is a late-mover advantage. Even with a late entry, technology can be improved.

What I’ve seen is that this happens in the L1 rotation game.

It feels like a new L1 becomes a hot spot every few months.

The earliest DEXs or lending platforms will have a clear first-mover advantage.

The above is just a small example of various mental models.

I encourage you to study more of the mental models of the past.

And I believe that new mental models will emerge from the crypto industry alone.

If you like the subject and want to go deeper down the rabbit hole, check out my post on cognitive bias .

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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