Unbank Yourself — What It Means, and What It Means for Your Retirement

To anyone who’s been buying and selling crypto for a while, “unbanking” is a familiar term. But what about someone like you, who’s new to crypto?

Does “Unbank Yourself” mean anything to you?

If it doesn’t, keep reading. This article goes into more detail.

Traditional Banking

For centuries, there was one type of banking. Until crypto came on the scene in January 2009, there was no other option. And “banking” had no modifier.

As the only game in town — or, more accurately, on the planet — it didn’t need one. You either had a bank account (or a credit union account), or you had nothing at all.

You had no access to credit, except perhaps the extortionate rates charged by loan sharks and, in our modern era, payday loan operations.

With the development of smart contracts, people realized that anything done by big conglomerates could be done in a trustless way, involving no middlemen, who usually extracted a hefty fee for their service.

As developers and users became more familiar with smart contracts, they realized that they could use them to bypass the banking system entirely. In effect, to unbank themselves.

DeFi Is Born

Together, they created the term decentralized finance to differentiate this system, under no one’s control, from conventional banking, under the control of commercial banks, central banks, and the International Monetary Fund.

In decentralized finance, which soon shortened to DeFi, the market sets the price of everything. There’s no market manipulation, and especially no government/central bank intervention in interest rates like we’ve seen for the past 20 years.

Along with this market freedom came more personal control. Each person using DeFi has complete say on how long to invest his or her crypto, what rate to invest it at, even how much to pay for a crypto-backed loan.

Centralized Finance Arrives

There was (and is) one problem with DeFi. As a holder of crypto wanting to earn more in interest than the banks pay, you need a thorough understanding of all the ins and outs of DeFi. And there are a lot of ins and outs to master.

A few entrepreneurs saw an opportunity to make it easier. They would master DeFi on behalf of people who wanted higher interest rates. In return, they would take a cut of the total return.

Because people’s money (as crypto) was now centralized under an organization, this system has become known as centralized finance, or CeFi.

Unfortunately, the term confuses many people, since they hear the word “centralized” and think of central banks and big commercial banks.

So the CeFi and DeFi people gave conventional banking a new name — traditional banking, which has been shortened to TradFi.

Which One Is Better for You?

The answer to that question is up to you. Here’s some information to help you make the decision about whether to unbank yourself.

TradFi pays less than 1% interest annually, and pays it monthly. In some cases, the interest rate is lower than 0.1%. For every $1,000 you leave in a bank, you’ll earn less than $1 (100 pennies) each year.

With inflation currently well above 7% a year, you don’t need a PhD in math to see that money left in a TradFi bank account will be worth less and less with each passing year, and even each passing month.

In fact, with inflation above 7% and your money earning less than 1% at a bank, in ten years, your savings will be cut in half.

Your savings will be worth half in just 10 years if inflation stays this high.

In the DeFi space, people are earning huge sums on their investments. In some cases, hundreds of percentage points. They’re also taking large risks. There are dozens of platforms they can use, and each one has a steep learning curve.

CeFi has taken the middle road. The interest rates these organizations pay out are considerably higher than the 0.1% or less that TradFi pays. In turn, they’re considerably lower than the rates that DeFi players are earning.

A stablecoin — a cryptocurrency pegged to the U.S. dollar or another fiat currency — can earn upwards of 50% annual percentage yield (APY) in DeFi.

It’s not likely that the stablecoins will sit in any one investment for a year though. And there are trading fees that cut into the total income earned.

In CeFi, that same stablecoin will typically earn 7% interest APY or more on some platforms. And the interest is often added to accounts weekly. So each week the interest starts earning interest.

And while there are trading fees, including fees to withdraw your crypto, on some platforms using the CeFi approach, there are no fees. No fees to swap tokens, no fees to withdraw them.

What About Loans?

TradFi loans typically have high interest rates, because they require little to no collateral.

Mortgages, on the other hand, have relatively low interest rates, but require a lot of collateral (something the borrower has to offer up to reduce the lender’s risk, which in the case of a mortgage is the house).

That collateral still doesn’t cover the entire amount of the loan, so the banks ensure that they can take your house if you stop making your mortgage payments.

DeFi loan rates are much lower, because they require much more collateral. To take out a DeFi loan at a low rate, you’d need to put up at least twice the loan amount as collateral. The lower the rate you want, the higher the ratio of loan to collateral.

CeFi takes a middle road. Rates charged are a bit higher, yet still low compared to TradFi. Collateral ratios are about the same (1:2 up to 1:4). What you receive is the convenience of having someone to talk to if anything ever happens.

For example, in January 2022, the prices of most cryptos took a nosedive. So, almost overnight, the collateral ratio people had backing their loans dropped, in some cases to almost 1:1.

In DeFi, smart contracts took over and started liquidating (selling) the loan holder’s crypto at those low prices.

In CeFi, loan holders had options, although they had to be implemented quickly. They could add more collateral. They could accept a higher interest rate based on the current collateral ratio. Or they could repay the entire loan.

Back to “Unbank Yourself”

Now that you know the differences between the three “types” of finance, you have a clearer picture of what “Unbank Yourself” means.

If now is the time for you to unbank yourself, click on this link to learn more about Freeway. I like the system, and the rewards (from 20% up to 43% annual interest), so much that I have an entire section about Freeway here on CryptoRetirees.com.