Compound Interest
DeFi Strategies
Compound Interest is the process where interest earned on an investment or deposit is reinvested to generate additional earnings over time. Unlike simple interest, compound interest calculates returns on both the original principal and previously accumulated interest, creating exponential growth potential in both traditional finance and DeFi protocols.
Use Case: A user stakes $KAG in a DeFi protocol offering daily compounding. Instead of withdrawing daily rewards, the protocol automatically reinvests them, allowing the stake to grow exponentially as each day’s earnings generate their own returns.
Key Concepts:
- APY – Annual Percentage Yield — Reflects compound interest effects over one year.
- Auto-Compounding — Automated reinvestment of earnings without manual intervention.
- Staking — Common DeFi activity that benefits from compound interest strategies.
- Compounding Frequency — How often interest is calculated and added (daily, weekly, monthly).
Summary: Compound interest is a powerful wealth-building mechanism that leverages time and reinvestment to accelerate growth. In DeFi, automated compounding protocols make this strategy accessible 24/7, often with higher frequencies than traditional finance, maximizing the exponential growth potential of digital assets.