I'm wondering what the best way to track users that a person refers(understanding that I am kind of a newb)

Say for instance that User A refers User B who Refers Users C and D

I want to be able to display:

Level 1: User A
Level 2: User B
Level 3: User C, User D

Now I have two ideas about how to go about this.
Option 1:
1 I could create a level 1, level 2, and level 3 field in table users.

Field 1 would be: User A
Field 2 would be User B
Field 3 would be UserC~UserD

Then I could take out the delimiter and such - but I was having trouble implementing this process....
Option 2:
This would be easier, from a newbie standpoint:

Table: Tracking
Fields: Sponsor, Ref, Level

When a member registers it will create 10 new rows in tracking(I will be tracking 10 levels).

Row 1: Sponsor 1, Ref1, level 1
Row 2: Sponsor 2, Ref1, level 2
Row 3: Sponsor 3, Ref1, level 3
Row 4: Sponsor 4, Ref1, level 4
Row 5: Sponsor 5, Ref1, level 5
Then the next member:
Row 6: Sponsor 1, Ref2, Level 1
Row 7: Sponsor 2, Ref2, Level 2
Then to show the stats I would do mysql like so:

$result = mysql_query("SELECT ref FROM tracking WHERE sponsor='sponsor1' AND level='1'")
or die(mysql_error());
while ($row = mysql_fetch_array($result, MYSQL_ASSOC)) {
echo $row['ref'];
echo " | ";
Which would return: referral1 | referral 2

I can see this creating a huge number of db entries, and am wondering if there's an easier way that I'm not thinking of. Would this be over-taxing to the DB?