Discover the Potential of DeFi-Enhanced FIRE Strategies (DeFIRE)

Imagine retiring years earlier than expected, with financial security and the freedom to travel the world or pursue your passions. This isn't a pipe dream, but a real possibility through Decentralized Financial Independence Retire Early (DeFIRE) - an innovative financial and retirement planning strategy rooted in Decentralized Finance (DeFi).

Incorporating DeFi into your investment strategy can provide several benefits, such as flexibility in managing assets, geographical arbitrage, possibilities to achieve a higher fixed rate of return, diversification, and adaptability.

This article will explore various DeFi strategies to achieve financial independence and early retirement, emphasizing the innovative and transformative aspects of DeFi in the context of FIRE. It will provide practical guidance and lower-risk DeFi strategies that can be added to your FIRE arsenal, helping you achieve financial independence and the lifestyle you've always dreamed of.

The outdated nature of the current pension and work system

The increasing life expectancy of people globally has led to a rise in pension ages. In the Netherlands, for instance, researchers predict that the pension age will exceed 70 years in the next decade. This trend is accompanied by a steady rise in the amount of wealth required to enjoy a comfortable retirement, as pension benefits are often indexed to inflation.

Furthermore, the traditional pension model assumes that all retirees have the same financial needs and circumstances. In reality, this could not be further from the truth - people's post-retirement expenses vary greatly depending on factors such as health status, lifestyle choices, and debt levels. It is becoming clear that this model is no longer fit for purpose.

Reflecting on this, the idea of working throughout one's life and only enjoying the last part when they are less vital seems increasingly bizarre.

This reality hit home when my father-in-law, a dedicated and hardworking individual, was diagnosed with pancreatic cancer as he is approaching his retirement age. He expressed regret over not having spent more time with his children due to his work commitments. This personal experience highlighted the paradox of working tirelessly for a distant retirement that may be compromised by health issues.

It underscored the importance of finding a balance between work and personal life throughout one's lifetime, rather than deferring enjoyment to a later, potentially less vibrant, stage.

It is essential for individuals to find a balance between work and personal life throughout their lives and consider alternative ways to secure their financial future during retirement, such as saving more, investing wisely, and exploring alternative sources of income.

The FIRE movement

One such approach to achieving financial independence and early retirement is the Financial Independence Retire Early (FIRE) movement, which has gained significant traction in recent years as more people seek financial freedom and the ability to retire early through (extreme) saving and investing.

The FIRE movement is inspired by a.o. the book Your Money or Your Life by Vicki Robin and Joe Dominguez. In summary:

I want to stress that FIRE is not solely about saving and investing but also about enjoying life and experiencing new things. Yes, It requires dedication, financial discipline, and a willingness to make significant lifestyle changes, but the aim is to have the financial freedom to lead the desired life. The ultimate goal is to achieve financial flexibility, allowing individuals to have more control over how they spend their time and money. I view "early retirement" as an opportunity to pursue full-time activities and interests that bring joy, such as spending time with loved ones, traveling, reading, analyzing, writing, and designing cool stuff.

There are different FIRE variations such as:

• Fat FIRE: A more easygoing approach that involves saving more while giving up less;

• Lean FIRE: This variation focuses on minimalist living and requires devotion to a simple lifestyle;

• Barista FIRE: Aiming to retire early while still taking on a side gig or part-time work to supplement income; and

• Coast FIRE: Saving and investing enough to stop contributing to retirement savings but still having enough funds to cover living expenses.

DeFIRE: Adding decentralized digital assets in the mix

I want to add another variation here, Decentralized FIRE (or DeFi-enhanced FIRE). Digital assets, cryptocurrency, or decentralized finance (DeFi) are oftentimes not in the vocabulary of the traditional FIRE movement, as it is seen as a speculative investment, and perhaps with valid reason.

However, institutional investors are increasingly interested in digital assets and blockchain technology, with many planning to allocate 1% to 5% of their portfolios to these assets.

DeFi refers to a suite of financial applications built on blockchain technology that aims to recreate and improve upon traditional financial systems. DeFi applications are typically built on top of a blockchain, such as Ethereum, and are often open source, meaning that anyone can access and use them. In order for DeFi dApps to work, it usually requires collateral to be locked into smart contracts, and the cumulative collateral locked in DeFi dApps is often referred to as the Total Value Locked (TVL).

Traditional methods of saving and investing often involve centralized institutions such as banks and brokerages, but with the rise of cryptocurrency and DeFi, there's a new way for individuals to pursue FIRE that offers increased control, security, and potential for higher returns.

Incorporating DeFi to the FIRE mix can provide several benefits, including:

1. Flexibility in managing assets: With self-custody and decentralized solutions, individuals have more control over their investments and can easily move funds between various DeFi applications to optimize returns, manage risks, or access new opportunities as they arise.

2. Geographical arbitrage: DeFi allows you to take advantage of differences in costs between two geographic locations, enabling you to earn income in a strong currency and spend in a weaker currency. (e.g. living in a lower-cost location can significantly reduce your expenses, allowing you to save more money).

3. Possibilities to achieve a higher fixed-rate of return: DeFi provides various financial applications that can help users earn fixed-rate yields on their investments. This can be useful for FIRE enthusiasts who want to generate passive income and maintain a stable financial portfolio.

4. Diversification: DeFi can offer diversification benefits, as it allows users to invest in a wide range of assets and protocols (and traditional methods). This can help spread risk and provide a more stable passive income streams.

5. Adaptability: DeFi is a rapidly evolving field, with new protocols and applications being developed constantly. This adaptability can help FIRE investors stay ahead of market trends and potentially achieve higher returns on their investments, which reduces the time to reach their FIRE milestone.

Patrick Collins also summarizes the better rates on DeFi (Aave protocol) compared to CeFi (Coinbase) and TradFi (banks):

Given that decentralized finance (DeFi) is still considered an emerging market, the interaction with decentralized applications (dApps) within DeFi carries various risks, such as smart contract risk, increased volatility, and potential scams. Investors should be compensated for these increased risks, which justifies the higher yield earned via DeFi. Diversifying investments across multiple DeFi platforms is essential for risk management.

The Lindy Effect, a concept that suggests the longer a non-perishable item has been around, the longer it's likely to persist into the future, is applicable to DeFi/ cryptocurrency investments:

This is even more true, when the dApp has been through the recent bear market and functioned correctly. Keep this in mind when using a dApp.

How to apply DeFIRE

As an investor on the FIRE path, it is important to focus on cutting costs, wealth creation, and wealth preservation.