Compound Interest
Interest earned on principal plus previously earned interest
Definition
Compound Interest means interest earned on principal plus previously earned interest. In DeFi, the concept matters because it affects risk, return, liquidity, governance, or execution assumptions.
Example
A vault reinvests rewards daily, turning simple farming rewards into compounded return.
What to check
Separate sustainable revenue from temporary incentives and ask who pays the yield. The main checks are: Overstated APY assumptions; Gas and execution costs; Smart contract risk.
Risks to Consider
- Overstated APY assumptions
- Gas and execution costs
- Smart contract risk
Common Questions
What does Compound Interest mean in DeFi?
Compound Interest means interest earned on principal plus previously earned interest.
How is Compound Interest used in practice?
A practical example: A vault reinvests rewards daily, turning simple farming rewards into compounded return.
What should I check before relying on Compound Interest?
Separate sustainable revenue from temporary incentives and ask who pays the yield. The main checks are: Overstated APY assumptions; Gas and execution costs; Smart contract risk.