What is the inspiration behind auto-compounder & can you compare it to a user manually reinvesting their staking rewards?
Big Wampa (Founder)
So auto compounding is an interesting concept. It actually took me a little while to wrap my mind around it when it was first introduced to me by by Abominable Sasquatch, but the idea is that if you are providing liquidity to a decentralized exchange say Pangolin or Trader Joe you are rewarded for that liquidity with the platforms token PNG and JOE token perspectively. This token is meant to incentivize additional liquidity on top of the transaction fees that you would get for providing liquidity. So when you compound what you would do is take your liquidity rewards and then sell them for whatever the underlying tokens are that you're providing as liquidity to the platform. So let's say I am invested in the Avax wrapped ETH pool on Pangolin, so I’m getting PNG tokens as an individual I can auto compound maybe weekly or daily selling the PNG tokens that i've received, half for wrapped Avax and half for wrapped Ethereum and then depositing them into the liquidity pool for new LP tokens and then repeating that process. So the problem is that as you go through this process as an individual you're expending Avax tokens on gas right and you need to pay the gas fees to withdraw to claim your rewards tokens to sell them for the underlying assets that you want to invest in. Depositing those back and each of those steps there's a gas fee and in addition to that you as an individual managing this process need to decide at what cadence are you doing this and you need to either write a script to do this for yourself or you need to you know sign in and manually go through yourself so it's not only costing you the capital in form of gas costs but it's costing you your time and so by using an auto compounder this is automated for you and the gas costs are amortized across everyone who's invested in that auto compounding pool. So what i mean by by amortized is that the user has to pay this gas fee and the gas fee is the same whether they're auto compounding ten dollars worth of liquidity or whether they're auto compounding 10 million dollars worth of liquidity so the the capital efficiency of auto compounding is increased by having more capital more more in the liquidity pool that's being auto compounded. So by everyone pooling together they're reducing the amount of money that's spent on auto compounding per person and so how Snowball handles this, is we have this very complex infrastructure that looks at things like the price of gas and the amount of capital available for auto compounding and does some calculations and determines is this an efficient time to auto compound. What this means is that we we try to optimise for the maximum return for the user and this is a different approach than that utilized by Yield Yak. For Example, where Yield Yak have the community do the auto compounding and not the platform. In this pros and cons to this one thing that we've noticed is on Yield Yak, the compounding is not efficient, so they're over compounding which doesn't actually yield additional returns for the user who's invested because after around once per day there's equations that govern this but after compounding once per day the returns you get are near zero so the difference between compounding once per day and once per second is negligible. It's a rounding error and it's not gonna be noticeable at the end of the year when if you like decide to take your profits but you know the gas cost to the community of you know individuals hitting the compound button as often as they do on Yield Yak will be noticeable that's just Avax being burned right for no particular benefit. So it's a net neutral to the individual investor but for the platform as a whole I’m not sure whether that's good or not but all that is to highlight that we take a different approach, we just automate the process of compounding and try to make it mathematically efficient & financially efficient.