Strategies
Auto-compounding
Automatic Compounding
Automatic reinvestment of interest, fees or token rewards
Definition
Auto-compounding automatically reinvests earned interest, fees or reward tokens into the earning position. It changes exposure as well as return: selling rewards and redepositing requires executable trades, gas and an actual reinvestment policy.
Example
A $1,000 position earning a hypothetical 1% each month becomes $1,126.83 after 12 reinvestments: 1,000 × 1.01^12. Without reinvestment it earns $120, assuming fixed principal and no fees.
How it works
A keeper or user triggers a harvest. The strategy claims rewards, swaps them if required and adds the proceeds to principal; the next return applies to that larger position.
Risks to Consider
- Reward sales can suffer price impact and sandwich extraction
- Harvest costs can exceed small rewards
- The added strategy contract can lose funds through approval or accounting flaws
Common Questions
Is auto-compounding the same as compound interest?
Compound interest is the growth effect; auto-compounding is the mechanism automating reinvestment. A strategy can auto-compound volatile rewards without delivering a stable interest rate.
