Auto-compounding means that the user's investment yields are automatically reinvested into the investment principal at regular intervals, so that the investment yields of the investment yields can be obtained in the following time. It is one of the most common and robust investment strategies.
Almost all protocols' yield opportunities (such as liquidity mining, transaction mining, borrowing mining, etc.) require users to manually interact with smart contracts to obtain yields. Moreover, if the user wants to reinvest these yields back into the investment principal and continue to obtain investment yields, he or she needs to further manually interact with the smart contract.
In order to achieve higher returns through compounding interest, users need to interact with the protocol frequently to reap their investment yields and reinvest. However, the vast majority of users are unable to manually maximize returns for the following reasons:
- The optimal compounding time interval is generally less than 1 day, and most users cannot keep interacting with the protocol in such a short time interval.
- Harvesting your own investment yields and reinvesting require gas fees. Frequent operations on some chains can come at a high cost making it not viable as a yield strategy.
The Auto-compounding strategies solve the above two problems faced by a single user:
Harvest and reinvestment through program automation, enabling continuous operation at very short optimal compounding time intervals.
By bundling the harvesting and compounding operations of all users together, one operation completes the harvesting and compounding operations of all users, which greatly reduces the gas cost of all users and improves the benefits of all users.
The following are the detailed operations of a strategy:
User deposit: The user deposits the principal token corresponding to the strategy into the strategy contract.
Strategy contract deposit: The strategy contract deposits the received tokens into the mining pool of the underlying yield protocol corresponding to the strategy.
Strategy contract reinvestment: After the optimal compounding time interval, the UpDeFi platform will call the strategy contract reinvestment method to swap the earned tokens obtained by all users from the mining pool of the underlying yield protocol during this period into stake tokens and reinvest again into the mining pool of the underlying yield protocol.
User withdrawal: Users can freely withdraw their principal deposited on the UpDeFi platform and their investment yields and re-investment yields from the mining pool of the underlying yield protocol, as well as the UP tokens that are given as a reward to users by the UpDeFi platform, at any time.
We understand that any fee may mean a decrease in user revenue, but, we also understand that the effective use of protocol revenue can better help the UpDeFi protocol grow, thereby bringing higher benefits to users of the UpDeFi platform.
In order to ensure the long-term development of the UpDeFi protocol and bring the highest income to UP token holders, the Auto-compounding strategies require the following fees:
NOTE: These fees are deducted from the yields harvested by the strategy during this period when the reinvestment operations are performed by a strategy.
Gas Fee: This fee is the gas fee necessary for UpDeFi to ensure timely reinvestment after the optimal compound interest interval. The fee rate is 0.5%.
Strategist Incentive Fee: This fee is to reward strategists who develop the strategy. It can motivate strategists to continuously contribute high-yield strategies to the UpDeFi platform. The fee rate is 0.5%.
UpDeFi Platform Revenue: 90% of this part of revenue is directly distributed to the UP token stakers, and 10% goes to the UpDeFi DAO treasury to provide support for the protocol including product, development, auditing, and market cooperation expenditures. The fee rate of platform revenue is 3.5%.
Yield aggregators with auto-compounding strategies face the risk of being attacked by flash loans to capture user profits (the users' principal will not be attacked by flash loans) when reinvesting. Therefore, yield aggregators usually have deposit fees or withdrawal fees designed to avoid flash loan attacks.
UpDeFi protocol also adopts the design of the deposit fee to avoid the risk of being attacked by flash loans, but UpDeFi protocol and the team do not charge the deposit fee. The deposit fee is handed over to the existing users in the strategy when a user deposits funds in the strategy.
When “user A” deposits funds into an auto-compounding strategy, a small percentage of his invested principal is distributed to all users already in the strategy. Similarly, users who deposit funds after “user A” will also need to allocate a small percentage of their invested principal to users who entered the strategy before them, so “user A” can share this part of the principal.
The deposit fee is actually a long-term commitment incentive. The earlier the user deposits into the strategy and the longer the duration they stay, the higher the long-term commitment incentive they can get.
NOTE: The current deposit fee is 0.08% of the principal amount.