Author: 2LAMBROZ.ETH Compiler: Cointime.com 237

The saying "if you compound your earnings, you may lose money" means that there is a certain amount of risk when you reinvest the earnings you earn to obtain higher returns. This is because market fluctuations and unpredictable factors may cause you to lose money in the process of compounding.

Whether you should compound your yield farm depends on a variety of factors, including your view of the market, your tolerance for risk, and your investment goals.

Compounding can accelerate the growth of your money, but it also comes with higher risk. If you believe the market will remain stable or rise, and you can stomach the potential risk, compounding may be a good option.

However, you may miss out on some gains or suffer losses during the compounding process. Market volatility and uncertainty may cause you to lose money during the compounding process. Therefore, when considering whether to compound, you need to weigh the potential returns against the risks and make a decision based on your own situation.

Here’s an experiment on when you should compound your yield farm that can help you make that decision.

If you don’t have much capital, your annualized rate of return is not high, or the gas fee is expensive, compounding your liquidity provider (LP) may result in losses.

In this post, we will introduce a formula that teaches you how to take compound interest into account and find the "theoretical optimal return".

Assumptions:

The annualized rate of return is 20%

The stake value is $1000

Compounding gas costs $0.5

In this case, the optimal compounding interval is every 65 days.

So, what is the specific calculation method?

As shown below:

Let's keep it simple.

This equation has a lot of assumptions, but basically it calculates your compounded annual rate of return based on the following factors:

1) Daily rate of return

2) The amount you pledge

3) Frequency of rebalancing (i.e. how often you decide to make adjustments)

If we go a little deeper into this:

Basically, if your "daily rate of return" is low, you probably don't need to compound as frequently.

The calculation formula of "daily rate of return" is as follows:

Daily yield = (staking amount × yield) / 365 / compounding frequency - gas fee

the answer is:

Rebalancing every 53 days would give you a return of 21.39% instead of just 20%!

Same situation, but with higher yields:

1) The annualized rate of return is 200%

2) The pledge value is $1,000

3) Compounding gas costs $0.5

I'll leave this Excel sheet for you to use at the end.

But the key rules are:

1) The higher the rate of return,

2) The more capital you have,

3) The less gas you need to pay.

If the opposite is true (low yield, low capital, high gas costs), you probably shouldn’t be compounding to avoid lowering your annualized rate of return.

If you have read this far, I want to apologize that this article has no value or depth of insight.

Because in reality, your annualized percentage yield (APY) is not fixed.

The annualized rate of return is affected by the following factors:

1) Transaction Fees

2) Liquidity mining income token price

3) Total locked value (TVL) of liquidity mining

Therefore, this is just a pointless post.

I wrote this post because I was trying to figure out if my 20% APY WBTC/ETH pool was worth the compounding.

And I thought you might like to know:

1) The higher the annualized rate of return,

2) The more capital,

3) The less gas you need to pay.

More frequent compounding may be necessary.