// GLOSSARY -- DEFI

What is Auto-Compounding?

1 min read Updated

Auto-compounding is an automated process that harvests earned yields and reinvests them back into the position — maximizing returns through the effect of compound interest without manual action.

WHY IT MATTERS

In DeFi, many yield sources don't compound automatically. You earn COMP tokens from lending, CRV from liquidity provision, or staking rewards — but these sit idle unless you manually harvest and reinvest. Auto-compounders do this for you.

The gas cost matters: compounding too frequently wastes gas, too infrequently leaves returns on the table. Optimal compounding frequency balances gas costs against missed compound returns, typically ranging from daily to weekly depending on position size.

Protocols like Beefy Finance and Yearn automate compounding across hundreds of strategies, aggregating gas costs across all depositors for efficiency.

FREQUENTLY ASKED QUESTIONS

How much difference does compounding make?
Significant at high APR. A 50% APR with daily compounding becomes ~64.9% APY. The higher the base rate and more frequent the compounding, the larger the APY/APR gap.
Is auto-compounding worth the fee?
Usually yes. The compound interest gain typically exceeds the protocol fee (1-5% of profits). Manual compounding is only more efficient at very large position sizes where you can optimize gas timing.
Do all yield positions benefit from compounding?
Positions where rewards are separate tokens (farming rewards, staking emissions) benefit most. Positions where yield is inherent (lending with aTokens) may already compound natively.

FURTHER READING

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