Stacking - Compound Interest

[casperBGD]

Since there is a growing number of PoS coins/tokens, with indicated interest APY, I would like to clarify for beginners what Interest / Compound Interest is, and how one can use it in their own best interest, to improve their earnings through PoS coins/tokens, but not to overwhelm with two much work around what should be passive earnings

first thing first - let us take for example a 100% APY, which is not realistic at the moment, but should be useful to show what is the best frequency to compound interest

what is compound interest - it is when you take your interest in some time intervals (weekly, monthly, yearly) and add it to your initial stake for interest
for example you have 1000 USD in your stake, on a yearly level, with 10% interest APY, and than after a year you earn 100 USD add it to your initial stake and put 1100 USD for another year, instead of spend this 100 USD, and leave just 1000 USD as initial stake

what could be seen on a image is when you invest and compound interest in ten years, it is good enough option to compound even on a yearly level, have good enough interest above just putting initial stake, with more frequency adding lower amount to initial stake


when speaking on a yearly level, if you put your stake with 100% interest, having following gains:
- just putting with 1000 USD - will give you 2000 USD at the end of the year
- having monthly compound (12 times a year) - will give you 161% interest in the end - having roughly 2610 USD at the end
- having weekly compound (52 times a year) - will give you 169% interest in the end - having roughly 2690 USD at the end
- having it daily/constantly in the end - will give you 171% in the end - or roughly 2710 USD at the end

it could be seen that compound more than on a monthly level is getting more work with not so good difference to monthly level, and if you introduce some transaction fees, it could actually be lower than, due to transaction fees on the network

EXAMPLE

one example for Zilliqa project, with current annual yield at roughly 20% for Zilliqa, then you have following for 1000 USD:
- without compound 1200 USD at the end
- with semi-annually (two compounds ) - 1210 USD
- with monthly (12 compounds) - 1219 USD
- with daily compound (365 compounds) - 1221 USD

it could be seen that even monthly is too be considered as high effort for small difference, and daily will even put you in minus with all transaction fees

edit:
as @BrewMaster pointed out, this analysis did not consider price changes for underlying asset (coin/token), because primary goal was to provide optimal number of compounds in a given period
Disclaimer: this is not a financial advise, do not take this as advice for buying Zilliqa at any point

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[mrob82]

It's eerily similar to mortgage backed grouped security or possibly REITS the way a lot of these alts are starting to transition their idea of "investing."  People really need to be careful based on the current S&P ETF that is going to create some drama.  First, people need to look at the basket of coins that is going to be in that ETF.  Second, they need to watch the next step that the institutions take in regards to a vehicle.  My guess is it's either going to be an inverted/reverse ETF, an "X" leveraged ETF (more than likely 3x), or a grouped ETF (my favorite, advertise as it holds BTC, fine print says BTC holding in ETF is 0.0001% of entire ETF).

I have been saying it for a couple of years, people need to be extremely cautious and outright skeptical when institutional investors start setting up the parameters and rules for cryptocurrency "investments."

[BrewMaster]

the only problem here is that when you stake altcoins you aren't actually investing USD so your examples have false values. when you buy an altcoin and get profit on that altcoin, your are increasing the amount of that altcoin you have. whether your initial capital (eg $1000) is now worth more or less ($1200 or $800) depends on whether that altcoin's price had gone up over that period or not.

for example a lot of altcoins, specially those that give users "profit", lose their value in long run which means after a year $1000 worth of that altcoin is no longer worth $1000 and is worth a lot less instead.

[casperBGD]

the only problem here is that when you stake altcoins you aren't actually investing USD so your examples have false values. when you buy an altcoin and get profit on that altcoin, your are increasing the amount of that altcoin you have. whether your initial capital (eg $1000) is now worth more or less ($1200 or $800) depends on whether that altcoin's price had gone up over that period or not.

for example a lot of altcoins, specially those that give users "profit", lose their value in long run which means after a year $1000 worth of that altcoin is no longer worth $1000 and is worth a lot less instead.

agree on this one, total value does depend on altcoin value at that moment, but total count is the same, you can just take particular altcoin instead of USD

what was the point of the article, is that you do not need to compound your initial investment more frequently than on a quarter level, or monthly if transactions fees are low, shorter time interval would not provide you additional value

[tranthidung]

The DeFi tokens are repeating what stake/ masternode coins have in the past (2018 is the year of hundreds of stake/ MN coins. They were created on daily basis). Where there are games, there are participants and there are winners and losers.

I don't say I am a winner or will be such winner if I join the game, but some points to note if you want to win

• Entry and exit points (price and time): Join too early and exit super fastly after that can give you profits and safe (of course if you have internal info or the project you are invest in are not scam and fails in the egg)
• Accept high price at early phase but still later than the first one, but staking/ yielding rewards are still high. You can get lots of coins in a few days BUT you need to be very determinant to exit. Hesitation will cause stuck and losses.
• Wait patiently till the phase price was dropped too much, and inflation rate falls to acceptable rate: When you join, you have better safety and don't worry much about price crashes, just stake/ yield, get rewards and wait for price pumps to take profit. Again, when chances knock your doors, do it instantly, don't hesitate.
• Try to cash out and get your capital back first, you can be greed with the rest rewards. At least, don't lose your capital

[Welsh]

agree on this one, total value does depend on altcoin value at that moment, but total count is the same, you can just take particular altcoin instead of USD

what was the point of the article, is that you do not need to compound your initial investment more frequently than on a quarter level, or monthly if transactions fees are low, shorter time interval would not provide you additional value

That's entirely dependent on the altcoin of choice. I personally don't think there's any worth while altcoins which are going to last long enough for compound interest to matter. So, having compound interest monthly might be the better option, especially if the altcoin outlook isn't great. Although, personally I see compound interest on altcoins a unrealistic approach for the long term anyway, and they entice their users in by basically promising free tokens through compound interest, which in return creates a buzz for the project, and eventually the coins hit 0 or close too that.

[Filicius]

I calculated myself some time ago these numbers for a coin I'm staking and for me the best alternative was to re-stake weekly.

Of course, the difference between annually and quarterly is brutal, and it is also quite high between quarterly and monthly, but doing it weekly gave me at the end of the year a few hundreds more, so for me it is worth the effort (it is some kind of ritual today, every Sunday morning I open my wallet, claim and re-stake).

The numbers escalate with the amount you invest. So if you put 1.000, difference between 2.610 and 2.690 may not be worth the effort, but if you put 10.000, difference between 26.100 and 26.900 can be worth it (it's more than two brand new PS5s at the end of the year, some very happy free Christmas for maintaining the ritual).

Of course, taking into account the coin doesn't dump, but this is something usually out of one's action sphere, re-staking not. So better option than just hodling for an altcoin.

[casperBGD]

I calculated myself some time ago these numbers for a coin I'm staking and for me the best alternative was to re-stake weekly.

Of course, the difference between annually and quarterly is brutal, and it is also quite high between quarterly and monthly, but doing it weekly gave me at the end of the year a few hundreds more, so for me it is worth the effort (it is some kind of ritual today, every Sunday morning I open my wallet, claim and re-stake).

The numbers escalate with the amount you invest. So if you put 1.000, difference between 2.610 and 2.690 may not be worth the effort, but if you put 10.000, difference between 26.100 and 26.900 can be worth it (it's more than two brand new PS5s at the end of the year, some very happy free Christmas for maintaining the ritual).

Of course, taking into account the coin doesn't dump, but this is something usually out of one's action sphere, re-staking not. So better option than just hodling for an altcoin.

yeah, with more money involved, reward is greater, and there is also another "pair of shoes" to look at it, for example if you have ZIL with 20% yearly reward, you will double your initial investment in ZIL, within:
- five years, without compounding
- three years and 9,5 months, with yearly compounding
- three years and 7,5 months, with quarterly compounding
- three years and 6 months, with monthly compounding

so compounding matters, as you pointed out

for Cardano (ADA), for example, where you get compounded interest within each block, you get 70 compounding per year, and with cca.5% interest APY, you double your investment:
- within 20 years, without compouding
- within 14 years, with compounding that is implemented within Cardano stacking protocol, it is a big difference