Although the crypto market is famous for its volatility, there are various methods to compensate for it and turn an investment into a stable source of income no matter what happens in the market. Auto compound yield farming, also known as yield optimization, is one such method. In essence, it uses data analysis and algorithms to reinvest user rewards, eventually maximizing their APY (Annual Percentage Yield).
While crypto farming can provide you with a reliable income through stacking or working with liquidity pools, it can be complicated to make it viable in the long-term perspective, as you will have to keep track of several DeFi platforms or apps. Doing this manually can be resource-consuming, but there is a way to automate it, namely using the strategy of auto compound yield farming.
There are several metrics that help to estimate the profitability of crypto strategy. The most widely used ones are APR and APY. APR stands for Annual Percentage Rate and characterizes the annualized yield of a crypto investment, mainly through staking or lending. For example, if a certain crypto lending platform states 10% APR, it means you will get 10% from your initial investment in profits within a year.
APY takes compound rates into account allowing for a more precise estimation of your investment growth. Because of the effects of compounding and reinvestment, APY typically exceeds APR, and there are automated yield farming strategies designed to optimize this disparity.
Compounded Interest provides more profits because the interest earned gets added periodically (for example, on a daily basis) to your initial investment. As a result, the sum you get profits on grows each day. For example, without daily compounding, the 10% yield for 1 BTC will bring you 1,1 BTC at the end of the year. However, compound interest creates a snowball effect. For example, at the end of the first day, you will earn 0.0274% of your initial sum. On the second day, the next 0.0274% will be calculated as 1.000274 BTC. In total, you will earn 1.11 BTC, so even that simple difference yields you 0.01 BTC, which is significant.
Now that you understand the nature of compound interest, let’s look at the ways of automating yield farming. Essentially, it is a process of profits reinvestment, similar to that described above. Within a set period, the interest or rewards are collected, converted, and reinvested into the same pool, enhancing the growth of your investment.
The difference between manual and automated strategies can be characterized in the following way:
difference between manual and automated strategies can be characterized in the following way:
| Auto Compounding | Manual Yield Farming |
| Benefits: – Easier to use. – Better yields thanks to the automated search for better opportunities. – Reduced gas fees. – Integration of multiple protocols. | Benefits: – Users stay in control of every transaction. – Helps to avoid over-reliance on algorithms and automation. – Better handling of edge cases and unforeseen situations. |
| Risks: – The possibility of hackers discovering a vulnerability in a smart-contract. – Losses due to rapid price fluctuations. – The reliance on a single platform. | Risks: – Easy to miss profitable investment opportunities. – Prone to human mistakes. – Requires in-depth market analytics. |
To sum up, both manual and automated strategies have their advantages. For users who want an easy-to-use solution, automated options will be more beneficial. Manual yield strategies can be recommended to those who possess a thorough understanding of the market and want to stay in control of every transaction.
Similar to other crypto investment strategies, the auto compound has its risks and benefits. The main advantages of the approach are the following:
As a result, auto-compounds allow the increased passive benefits from the crypto investment. However, it comes with certain risks. The APY can fluctuate depending on the situation in the market which makes it hard to guarantee a certain number of yearly profits. Moreover, you need to thoroughly study the features of the platform you use, to ensure that your assets are protected from hackers or other malicious actors. Simultaneous, there are multiple risks and rewards of auto compound risk farming, however, the latter significantly outweigh the former.
At the heart of any auto-compounding vault, there are thoroughly coded smart contracts. The technology allows the blockchain to track rewards for each individual user, automatically calculate and reinvest interest, and prevent risks. Moreover, developers implement transaction processing algorithms to minimize gas fees, which is especially important if the reinvestment is conducted daily. For an auto-compounding platform to function efficiently, other components are also necessary:
The combination of the components described above comprises a reliable yield farming platform, and it is useful to consider these characteristics when choosing where to invest.
To effectively profit from the automated DeFi strategies, you need to choose the platform wisely. Generally, it is advised not to rely on a single strategy or one investment method, as in volatile markets it is better to diversify your funds. Below are several options to consider.
Beefy Finance is one of the leading investment platforms with the yield optimization function. It was launched in 2020 by a group of anonymous founders. It is based on a leading cryptocurrency technology, as at the time of its creation it became the first yield optimization platform to support Binance Smart Chain. The platform supports several vault types and employs multiple automated strategies, compounding user deposits at regular intervals.
If you are looking for an easy-to-use platform to gain passive income in cryptocurrency, Harvest Finance may be your choice. Similar to the previous one, it is based on the Binance Smart Chain but offers a more straightforward interface, which is more accessible for beginner investors. The platform is praised for its flexible yield optimization, encompassing over 100 yield strategies.
1inch is a modern DeFi ecosystem, offering its users various strategies for earning stable profits, both manual and automated. The multitude of tools presented on this platform encompasses a variety of investment opportunities and DEX exchanges within a secure and reliable ecosystem. It includes auto-compound strategies allowing to maximize yields with minimum manual effort.
There are other yield-farming platforms that offer their users auto-compound strategies as well, and their number may grow in the future. When choosing a platform to invest in, do not forget to study its documentation as well as external reviews. While it is impossible to avoid risks fully, you can mitigate them through thoughtful investment and using dependable DeFi resources. Keep in mind that the yields generated through the auto-compounding process may be subject to taxes, just like other investment profits. The particularity of the issue depends on your jurisdiction, so we advise you to consult a law expert with crypto experience if you are wondering whether you should pay taxes on crypto yields.
Contemporary, the auto-compounding strategy is a rapidly developing segment of crypto trading. While not all DeFi platforms currently offer them, the number of various automated solutions is growing, as they are very lucrative for crypto investors. They improve user experience and simplify the staking process, making it more accessible even for beginners. If you intend to make cryptocurrency a reliable source of passive income, consider adding a fund with auto compound to your assets under management.
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