I’ve been thinking about crypto and particularly DeFi from a perspective of non-crypto heads, passive income strategies and how they might apply here. I follow a few non-crypto finance channels, and they’re delightful people with delightful teeth, and they’re only too happy to share with you how they became millionaires. They talk about conservative investment, vehicles such as dividend stocks, real estate, bonds.
And they do talk about crypto but only as a speculative investment. And no mention of DeFi, most likely because they probably don’t know about it or just don’t get it.
IS IT REALLY POSSIBLE?
One of the promises of DeFi is financial freedom, and crypto heads crave independence. We feel oppressed by the modern monetary system’s restrictions. If you hang around finance chat long enough, you will undoubtedly come across the fire movement. No, that does not code for by XRP. it actually stands for financial independence retire early. It’s a movement dedicated to a program of extreme savings and investment that should, in theory, allow you to retire far earlier than traditional budgets and retirement plans would allow.
These cats dedicate up to 70 per cent of their cream to savings hoping to eventually be able to quit their jobs and live solely off small withdrawals from their portfolios decades before the conventional retirement age of 65. and it’s inspired by the 1992 best-selling book your money or your life by Vicki Robin and Joe Dominguez.
Fire captures a core premise: juxtaposing expenses and time spent at work against hours of your life. Every expense is compared to the time spent at work to earn the purchase. And in more recent years, millennials have embraced it and when you see how hard it is now to get a job, to get on the property ladder. Well, it’s kind of understandable.
The formula is pretty simple to save as much as possible, sometimes up to 70 of your income. Once their savings reach approximately 30 times their yearly expenses, they often retire. They are withdrawing three to four per cent of their net worth each year to live off. Sounds good, right? Well, does it sound like a giant orgy of penny-pinching and monk-like sacrifice?
there are several flavours of Fire that dictate the lifestyle followers are able and willing to abide by it; there’s
· Fat Fire, An individual with a more traditional lifestyle saves more than the average retirement investor.
· Lean Fire, which refers to stringent adherence to minimalist living and extreme savings. It is necessitating a far more restricted lifestyle.
· Barista Fire, which refers to followers who’ve quit their traditional nine-to-five job but still employ some form of part-time work to cover current expenses. That would otherwise, erode their retirement fund.
· Coast Fire, also applies to followers with a part-time job, but these proponents have enough savings to fund their retirement and current living expenses.
Today I want to introduce an entirely new flavour of Fire, Decentralized Fire or De-FiRE. We know crypto degens are mentally geared towards Fomo and aping but could retrain those pathways adopt fire methodologies, and enjoy genuine financial freedom. But without cashing out to fiat, using lending protocols or investing in synthetic stocks.
If you think these conservative passive strategies need big-time upfront capital, you are right. But one of the core skills here is understanding how much you spend and how much you need. So grab your calculator it’s time to do some maths.
The first thing you have to do is figure out what you’re comfortable with living on as an income. for most people, forty to fifty thousand dollars will let them live virtually anywhere in the world. But if you’re a mobile citizen, you can take advantage of geographical arbitrage and move to a different country where the dollar’s purchasing power affords you more. Now the average net monthly income of a US citizen is 3740 USD.
If you move south to Guatemala, for instance, it’s 261 dollars per month. That’s $3132 per year. Using the fire methodology, if you need to make that much pulling four per cent in passive income, you’re going to need 78.300 USD. That’s an extreme example. But it gives you an idea of how fire heads think. Using the four per cent standard, most people need around a million dollars invested in passive income strategies to live off the returns.
If I wanted to make a hundred grand a year, I would need $2.5 million working for me. And that sounds outrageous and far off. And probably entirely out of reach, but many will see their portfolios hit this figure and more at the recent ball run. The question is, what are they going to do about all that money once they do. Cash-out, taking your cash out of crypto and converting it into fiat currency isn’t as straightforward as just pressing withdraw. And when you’re at those levels, limits come into play, and your bank account might raise a red flag.
If a cool couple million dollars appears. Not to mention the taxable event in the US. The amount you pay in federal taxes on your crypto gains depends on how long you have held the coins and your ordinary tax rate. If you’ve held coins for one year or less, they’re considered short-term capital gains, and in this scenario, the gains are added to your income for tax purposes and taxed at your ordinary-income tax rate. This is the higher tax treatment scenario.
But if you have held the coins for more than one year, they’re considered long-term capital gains. And in this scenario, the gains are taxed between zero to twenty per cent depending on your ordinary income tax rate. And this is the lower tax treatment scenario. so it does make sense to think about not cashing everything out, but under our passive income scenario, only the four per cent or so that you need to exist.
So if we’re going to be looking at more conservative places to park money that still offer a decent return, then where do we look? Fire advocates generally look at real estate and stocks. They don’t ever mention savings accounts, and here’s why. A quick search for the best high yield savings accounts rates gives you this.
And compare today’s DeFi rate charts.
We could deposit stable coins into one of the many lending protocols listed on the DeFi rate, but there is an inherent problem. The interest rate fluctuates a lot, making it hard to build a conservative passive strategy where you need a dependable rate of return.
I realize dividends can’t be counted on either, but that does give us a neat segue into the next item we can look at.
Synthetic stones on mirror protocol, and it seems that there are more such platforms on the way. And with a 24/7 market opens up an exciting dynamic for trading traditional assets and, of course, Robin Hood’s recent freeze on GME trading. It does seem like this is the moment for these synths to gain greater exposure. So what sense can you trade? Well, it’s a small list at the moment.
I guess what I’m looking for is a fixed rate savings account. That pays better than those wretched sub-single-digit high yield quotes. The thing is, but I didn’t realize it was right under my nose all along, and not only that, it can be used to power some pretty interesting yield strategies for synth stocks as well. Its name Anchor Protocol.
It’s built on Terra, and it’s described as the reference interest rate across the universe of blockchains. And what’s particularly interesting is that it’s built around not one but four blockchains.
Terra, Polkadoti, Cosmos and Solana. The so-called interchain acid association. Anchors whitepaper describes it as the gold standard for passive income on the blockchain.
which sounds exactly what we’re looking for. “Anchor offers as they call it a principal-protected stable coin savings product that pays depositors a stable interest rate and it achieves this by stabilizing the deposit interest rate with block rewards accruing to assets that are used to borrow stable coins.”
Anker will thus offer DeFi’s benchmark interest rate determined by the yield of the pos blockchains with the highest demand.
A fixed interest rate, not a variable and a fixed one. This could be what I’m looking for now. This gets interesting because you find a peeks into the future if you run back through Do Kwon Ceo of Terra’s Twitter feed.
Integrating with Anchor to use aUSD as mirror collateral, the protocol enables yield-bearing stocks. In other words, hold apple stock to get more apple stocks.
That isn’t exactly a dividend, but it’s kind of a proxy for one, and because it’s all on the chain, it will be transparent and presumably simple to distribute too. I don’t know what the expected fixed interest rate will be on Anchor, and perhaps we shouldn’t expect anything too dramatic, but you would hope that it could at least match the four per cent required by our De-FiRE strategy. But if it’s more comparable to the current yields on stable coins at around 10% or so, then to enjoy a passive income of a hundred grand a year, you’d need a million bucks, not 2.5. and that makes a big difference, something to think about.
It is still super early on, but I think Anchor have it right when they claim a reliable savings protocol is the catalyst for the mass adoption of cryptocurrencies. Capital preservation is your goal with downside protection. That all makes a lot more sense, but there is just one caveat. Those savings accounts with terrible interest rates well they are FDIC insured.
Crypto savings won’t mind you, nor are stocks, so there is that. But being your own bank carries with it risks that you’ll definitely want to be mindful of, especially when dealing with sums in the seven figures or more.