Glossary · A
Auto-Compound
Automatically reinvesting earned yield rewards back into the same position to earn yield on yield — accelerating growth through compounding. In DeFi, auto-compounding vaults (like those on Yearn or Beefy Finance) claim protocol rewards and reinvest them multiple times per day, significantly improving effective APY vs manual compounding.
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How Auto-Compound works in practice
Auto-compounding vaults harvest rewards and reinvest them automatically, converting an APR into a higher APY without the depositor paying gas on every harvest. They socialise the transaction cost across all depositors, which is what makes frequent compounding viable for small positions.
Worked example
A vault harvesting daily on a 50% APR position produces roughly 64% APY. Doing it yourself at 5 of gas per harvest costs about 1,825 a year — which only makes sense on a large position, and destroys the return on a small one.
Figures are illustrative and chosen to be checkable, not live market data.
The mistake that costs people money
Vaults take a performance fee, often 10–20% of rewards, and add a second contract to your risk surface. The advertised APY is normally quoted after fees, but the extra smart-contract exposure is real and not in the number.
Auto-Compound: common questions
- What is Auto-Compound?
- Automatically reinvesting earned yield rewards back into the same position to earn yield on yield — accelerating growth through compounding. In DeFi, auto-compounding vaults (like those on Yearn or Beefy Finance) claim protocol rewards and reinvest them multiple times per day, significantly improving effective APY vs manual compounding.
- How does Auto-Compound work in practice?
- Auto-compounding vaults harvest rewards and reinvest them automatically, converting an APR into a higher APY without the depositor paying gas on every harvest. They socialise the transaction cost across all depositors, which is what makes frequent compounding viable for small positions.
- Can you give an example of Auto-Compound?
- A vault harvesting daily on a 50% APR position produces roughly 64% APY. Doing it yourself at 5 of gas per harvest costs about 1,825 a year — which only makes sense on a large position, and destroys the return on a small one.
- What do people get wrong about Auto-Compound?
- Vaults take a performance fee, often 10–20% of rewards, and add a second contract to your risk surface. The advertised APY is normally quoted after fees, but the extra smart-contract exposure is real and not in the number.