Lesson 2 - The Four Ways People Make (or Lose) Money in DeFi

In systems governed by discretion, identity matters.
Who you are determines what you can access, how you are treated, and which paths are available to you. Accounts, permissions, and status sit between intention and outcome. Finance has long been organized this way - not because it is elegant, but because discretion requires context, and context requires identity.

Permissionless systems operate differently.

In DeFi, the system does not recognize people.
It recognizes positions.

When you interact with a protocol, you do not arrive as a user. You arrive as a role - a functional position defined entirely by how you contribute to, and draw from, the mechanism. The system does not ask why you are there. It does not ask what you intend to do later. It evaluates only what you are doing now.

This distinction is easy to miss because interfaces continue to speak the language of users: dashboards, profiles, balances, histories. But beneath that surface, identity dissolves. What remains is function.

Liquidity providers supply capital to a mechanism that requires depth. Traders introduce imbalance by expressing demand. Stakers secure consensus by committing value to validation. Borrowers introduce leverage by locking collateral against future obligation.

These are not communities or archetypes.
They are systemic functions.

Each role exists because the system needs a specific behavior to continue operating. Each is compensated not for participation, but for absorption - of volatility, of delay, of opportunity cost, of risk. And each role carries exposure that is invisible until conditions change.

What makes this subtle is that roles are not fixed.

A single person can occupy multiple roles simultaneously, often without noticing the transition. Providing liquidity in one moment, trading against it in the next. Staking a token while borrowing against its derivative. Holding an asset passively while the system actively repurposes it through a mechanism you opted into earlier.

The system does not announce these shifts.
It does not pause to confirm understanding.

It simply executes the logic attached to the role you are inhabiting at that moment.

This is where many misunderstandings originate - not from lack of intelligence, but from misidentification. People believe they are “holding” when they are actually providing liquidity. They believe they are “earning yield” when they are compensating the system for absorbing a specific kind of stress. They believe they are passive when they are structurally exposed.

The system has no obligation to correct these beliefs.

In discretionary systems, roles are softened by intervention. A bank customer can be protected from the full consequences of their position because the institution absorbs the mismatch. In DeFi, roles are precise. When conditions shift, the exposure attached to a role becomes visible immediately.

This precision is not a trap.
It is a property.

Roles are how the system maintains coherence without oversight. By tying compensation directly to function, and exposure directly to contribution, the mechanism ensures that coordination persists even when participants change.

But this only works if roles are understood as such.

The most common mistake is to treat roles as labels rather than positions - as things you are rather than things you enter. In DeFi, you are never “a liquidity provider” in the abstract. You are providing liquidity under specific rules, at a specific time, in a specific configuration. Change any of those, and the role changes with it.

Nothing about this is permanent.
Nothing about it is personal.

There is no reward for loyalty.
There is no protection for familiarity.

There is only structure responding to participation.

Seeing this clearly changes how everything else is interpreted. Yield stops looking like income and starts looking like compensation. Risk stops looking like misfortune and starts looking like exposure. And the system itself stops feeling adversarial - because it was never negotiating with you to begin with.

Once roles are visible, the next question becomes unavoidable:

If no one is matching intentions,
and no one is deciding outcomes,
how do markets function at all?

That is where we go next.

Takeaway: In DeFi, you are never a user - you are always occupying a role with exposure attached.