How Compounding Works
Learn how MaxFi's auto-compounding feature and manual reinvesting multiply your returns.
Key Takeaways
- Auto-compounding reinvests matching-token fees during each rebalance
- The matching token is always the side that just got relatively cheaper, so you compound the discount and cash out the premium
- Over a round trip out one side and back the other, you sell high and buy low in both assets using nothing but your yield
- No swap is ever made, so there is no slippage and no forced conversion of your principal
- You can also compound manually by opening new positions with harvested fees
- Compounding turns good returns into great returns over time
What is Compounding?
You earn fees. Those fees get reinvested. Now those fees earn fees too. Your position grows faster and faster.
Think of a snowball rolling downhill. It picks up more snow. The bigger it gets, the more it picks up. That is compounding.
MaxFi's Auto-Compounding
When you deposit, you can enable Fee Compounding. Here is what happens:
- Your position goes out of range
- MaxFi waits (rebalance delay) to see if the price comes back
- MaxFi places a new range one tick spacing away from the current price
- During that rebalance, matching-token fees are automatically added to your new position
- Non-matching fees are sent to your wallet
No extra steps. Your position grows a little bigger with every rebalance.
What are Matching-Token Fees?
When your position is out of range, it holds mostly one token. If the price went up, your position is mostly USDC. If the price went down, your position is mostly WETH.
Fees earned in the same token your position already holds can be added directly to the new position. No swap needed. Fees in the other token go to your wallet because compounding them would require a swap.
Roughly half your fees get auto-compounded. The other half goes to your wallet.
Why It Compounds the Cheaper Side
Which token your position holds when it goes out of range is not random.
A concentrated range is a ladder of limit orders. As price moves, the pool sells you out of whichever asset is rising and into whichever asset is falling. By the time you are out of range, your position has converted into 100% of the asset that just got relatively cheaper. That is what a range does.
So at the moment of the rebalance, the system already knows which asset is trading at a premium. It does not need a price feed to work that out. The side you fell out of is the signal.
The new range is built from the cheaper asset, so fees in that asset compound into your principal. Fees in the other asset, the one trading rich, are sent to your wallet.
You take profit in whichever asset is expensive, and you accumulate whichever asset is cheap. Every rebalance, automatically.
A Full Round Trip
Take a WETH/USDC position.
ETH runs up and pushes you out of range. Your position is now 100% USDC, and WETH is the asset trading rich. The rebalance sends you the WETH fees as cash and compounds the USDC fees into the new position. You took ETH profit at the high and added to your dry powder.
Later ETH falls back and pushes you out the other side. Your position is now 100% WETH, because ETH got cheaper. It flips. The USDC fees go to your wallet and the WETH fees compound. You bought ETH at the low.
Out one side and back the other, you sold high and bought low in both assets, using nothing but your yield. That is where the rough 50/50 comes from. Nothing enforces it per rebalance. It falls out of the direction the price travelled.
No Swap, Ever
MaxFi never converts one token into the other to do this. The rebalance parks a new single-sided range next to the current price. There is no swap, so there is no slippage, no price impact, and no forced conversion of your principal.
The only thing being directed is the yield.
Watch the Token Count
The number to watch is how many tokens you hold, not the dollar value at the moment of a rebalance.
Adding WETH while ETH is down means that if it comes back, you are holding more units at a better price. Run that through a few cycles and both sides of the position grow in count.
This does not erase impermanent loss. If a pair trends one direction and never comes back, you keep accumulating the side that is falling, the same as any LP. What it does is stop you from selling that side at the bottom, and it keeps paying you out in the strong side the whole way.
Manual Compounding
You can also compound manually in two ways:
Option 1: Open a new position. Harvest your fees from maxfi.tech/positions. Use those tokens to open a new position on the deposit page. Now you have two positions earning fees.
Option 2: Withdraw and redeposit. Withdraw your entire position. Then redeposit with your original capital plus the fees and rewards you earned. This gives you one larger position.
Simple Example
You deposit $1,000. You earn 50% per year.
Without compounding:
- Year 1: Earn $500. Total: $1,500
- Year 2: Earn $500. Total: $2,000
- Year 3: Earn $500. Total: $2,500
With compounding:
- Year 1: Total grows to ~$1,632
- Year 2: Total grows to ~$2,665
- Year 3: Total grows to ~$4,350
Same starting amount. Same rate. But compounding gives you $4,350 instead of $2,500.
What You Learned
- Auto-compounding reinvests matching-token fees during each rebalance
- You can also compound manually by opening new positions with harvested fees
- Compounding turns good returns into great returns over time