An automated or manual process within decentralized finance protocols that reinvests earned interest or rewards back into the principal asset. This mechanism allows the accumulated yield to generate further returns, accelerating the growth of an investment over time. It leverages the power of compound interest in a transparent and programmatic manner. Yield compounding is a fundamental strategy for maximizing returns in various DeFi applications.
Context
Yield compounding mechanisms are frequently discussed in DeFi news, particularly concerning yield farming and liquidity provision strategies. The efficiency and frequency of compounding can significantly impact overall profitability for users. However, these mechanisms can also introduce additional smart contract risks and transaction costs that participants must consider.
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