Wow... I forgot about compound interest...

LeoFinance
1 month ago
(edited)
3 Min Read
515 Words

interestratesaprinflation.jpg

So I've been posting about Koin mining an obscene amount, I need to give it a rest but I just can't stop. I'm not even necessarily bullish on this project and still remain salty from the Steemit DEV team abandoning ship and starting their own shitcoin.

However, the Koin premine via CPU lottery is undeniable. The profits are right there for the taking and there is no speculation in the matter. Anyone can mine profitably and turn those funds directly into USD if they so desire. The interesting thing here is that most miners are HODLING, even the ones who own massive percentages of the currency. There's a lot of bullish feelings here. I'm having EOS ICO flashbacks.


In any case, I've been talking about farming the Uniswap pool and how profitable it is. If the 24 hour volume stays near the total volume, that means you can yield farm 0.3% of your money per day. 365 days in a year, that's 109.5% APR...

OR IS IT?

No, it's not. Because when anyone makes a swap on Uniswap, you get the fee instantly, and it's automatically added to your liquidity. This interest is then used to create more interest on the next swap. This is called compound interest, and it is powerful.

So while 109.5% APR sounds like a lot... it's even higher than that. Imagine you farmed a return of 0.3% per day. That's not (0.3% x 365 = 109.5%). In reality, it's 1.003 to the 365th power (1.003^365 = 2.98). Therefore, you'd essentially be TRIPLING YOUR MONEY EVERY YEAR (200% APR).

When not accounting for compound interest, we get a false number that is actually half as big as the real one... wow... interest creating interest is really powerful.

That's because interest that creates interest is an exponential effect. Just because the percentages are small it is still exponential (again 1.003^365 power is an exponent). Compound interest creates exponential growth, and that's what you get as a Uniswap LP provider.

But wait, I'm not done!

Because Uniswap doesn't give you compound interest per day like a garbage banking institution, it gives you compound interest on every single trade made that day.

Napkin Math

Let's say instead of 0.3% compound interest a day, there were 24 Uniswap trades every day on average; one per hour. So instead of making 0.3% a day you're making 0.0125% an hour.

What's the difference between compound interest per day vs per hour?
  • Well, there are 8760 hours in a year.
  • 1.003^365 = 2.98
  • 1.000125^8760 = 2.99

Okay, I'm done.

So replacing interest-per-transaction with interest-per-day is not a big deal, but ignoring compound interest entirely is a huge deal. Math is hard sometimes; it's easy to make a little mistake that domino-effects into a huge output error. In this case my estimates were off by almost double. Farming a Uniswap pool that has 24/h volume equal to liquidity will net LPs 200% APR. Pretty crazy considering the exchange fee yield is only 0.3%. That's the power of compound interest.