Yield Compounding

Definition ∞ Yield Compounding is the process of reinvesting earned returns or profits from digital assets back into the original investment to generate additional earnings. This strategy allows the returns themselves to earn returns, accelerating the growth of the principal over time. It is a common practice in decentralized finance to maximize gains from staking, lending, or liquidity provision.
Context ∞ In cryptocurrency news, yield compounding is a frequently highlighted strategy for maximizing returns within decentralized finance protocols. Participants in DeFi often seek platforms that facilitate efficient compounding to grow their digital asset holdings more rapidly. Understanding the mechanics and risks of yield compounding is essential for investors looking to optimize their passive income streams in the digital asset market.