Elephant Money Part 3: Compound Less Often and Save On Gas
How many times have you seen a crypto project pressure you to take action?
1% daily ROI!
0.56% per day!
2% every 24 hours!
We are urged to get off our collective butts and run to our computers immediately. Are you on vacation? Well too bad, better bring your laptop!
This type of advertising causes many users to feel a constant anxiety; if we do not log in to MetaMask every day we will be wrecking our financial future, and even worse our “gainz.” We are persuaded to log in to our investment platforms and click compound, claim, roll, or whatever action is needed.
I see many users on the Elephant Money Telegram and Discord ask questions about gas fees and how often to roll or claim rewards.
In this article, I show why you don’t need to compound your TRUNK earnings every day, and how you can save on gas fees over the long term.
(Also, I highly recommend reading Part 1 and Part 2 of my Elephant Money deep dives)
When I use the word “compounding,” I refer to this sequence:
- Investment (principal) is generating interest
- Add interest to principal investment
- Principal investment is now generating more interest
- After some amount of time has passed, go back to step 2
Compounding is synonymous with the “roll” button in Elephant Money Stampede Perpetual Bonds. For more information on rolling, check out my previous article.
To determine how compounding daily, weekly, or monthly will affect an investment, we must first explore the most fundamental investing concepts: Annual Percentage Rate (APR) and Annual Percentage Yield (APY).
If you have ever shopped for an auto loan, watched T.V. commercials, or are finally getting your feet wet in DeFi, you have seen APR and APY everywhere.
Stampede Perpetual Bonds advertises 205% APR and 672% APY.
What do these numbers mean?
Let’s break it down:
APR — yearly interest rate being paid without any compounding. The interest rate is constant and interest generated will be constant for the same amount of principal investment. Example: A 10% APR investment will pay the exact same percentage over a day (APR÷365), month (APR÷12), a quarter (APR÷4) if there is NO compounding involved. Compounding is where APY comes in.
APY — yearly total return on investment. APY is a function of both APR and how often interest is compounded. Also known return-on-investment (ROI). Or as I like to call it, my “gainz”.
Think of APY as the “actual result” of your investment. Factors including token prices, APR, and compounding frequencies all affect APY.
For those interested in the math, The Calculator Site has a fantastic breakdown of how compound interest is calculated:
APY is a function of both APR and compounding frequency. Let’s fix APR at 10% and see what happens after 1 year:
Compounding daily through monthly at 10% APR barely makes a difference in terms of the final result — APY. Some “roll off” starts when you compound only once a quarter. Even if you only compound once per year, the difference between compounding daily and annually at all yields a difference of 0.49% APY.
For a small-fish investor, this 0.49% difference between compounding daily and annually at 10% APR is not very significant. This difference is massive if you are dealing with $100B TradFi loan tranches.
Compounding does not have a large effect on lower range APR/APY.
If we turn the above simulation around and plot as a function of time, we can see a lot more data. Keep in mind, the bar chart above is representative of day 365 on the line chart below.
We are going to view percent return on a daily basis. So, let's not call the return APY, but ROI. We will reserve the term APY for the ROI at 365 days.
Wow, this plot looks like abstract art!
- Each time the line “jumps” is when a compounding event is triggered.
- Compounding events cause a “stair step” behavior each time interest is compounded onto the principal investment. This behavior is why compounding annually has one massive jump at the end.
Here is the same chart zoomed in so you can see that even compounding every-other-day has a stair stepping behavior:
Interest rates of 0% to 10% are common in the TradFi world, but this is DeFi; we can do better. And Elephant Money does.
What happens if we make the same charts as above, but crank the interest rate to 50%?
There is a much bigger difference between each condition compared to our 10% APR charts. Instead of a 0.49% APY difference for daily vs annual compounding, we are now looking at a 14.59% difference for a 50% APR investment. That is almost $15k if investing $100k!
Now the differences are looking more pronounced. Although, between daily to monthly compounding, there is still barely a percentage point of difference.
Our abstract artwork looks very similar at 50% APR, but there are a few key differences. Let’s zoom in around day 365:
With increasing APR, the ROI/APY of each compounding frequency starts to diverge. Compound daily thru monthly, the resultant APY is practically the same. But compound quarterly and longer, and the APY has more of a pronounced decline.
Let’s look at all APRs between 0% to 300% over 1 year. This range covers the APRs relevant to Elephant Money:
- TRUNK Staking APR: 30% (variable)
- Stampede Perpetual Bonds APR: 205%
Since we are referring to the 1 year ROI, we will flip back to using APY as the final result of our investment.
We will also view the data using “logarithmic scale” (log scale). If you are not familiar with log scale, here is what it means: instead of the vertical axis tickmarks being equally spaced linearly such as 1, 2, 3, and 4, the axis is skewed and compressed to have the tickmarks spaced by order of magnitude such as 10, 100, 1000, and 10000. Using log scale can allow us to view the behavior of functions across a very wide range in a small space.
Compounding daily, every other day, and weekly give approximately the same result over the long term!
Since Stampede Perpetual Bonds pays out 205% APR, we can also verify the exact numbers with a quick APY calculation:
We will lose 25.55% in APY if we compound weekly instead of daily. This loss is only a 3.8% reduction in overall ROI.
For me, this is great news. I am willing to trade 3.8% for not having to log in to Elephant Money 7 days a week!
In this last section, we will review gas fees for different rolling frequencies.
The monetary impact of gas fees depends on three factors:
- Complexity of the transaction: If you are performing a transaction that is interacting with many smart contracts, it will cost more gas than a simple transaction
- Network congestion: The current “gwei” on an Ethereum Virtual Machine blockchain such as BSC. Gwei scales gas prices based on network congestion. On BSC, gwei seems to have stabilized around 7 gwei.
- Gas token price: Gas is paid in the blockchain’s native token. If BNB price is high, then gas fees will be high in terms of fiat dollars.
Let’s see what cumulative gas fees look like for Elephant Money rolls.
Here are two different Elephant Money transactions: TRUNK staking roll and Stampede Roll.
We can see that the Stampede Roll transaction is much more gas intensive. Stampede Roll interacts with more contracts than a staking roll, so Stampede transactions will cost more gas.
If you are Stampede rolling daily, expect to pay 0.5 BNB in gas over 1 year. If you only have a few hundred dollars in Stampede Bonds, rolling daily will significantly eat into your returns in the first year.
In conclusion, here are my recommendations to the Elephant Money HERD:
- Logging in to compound more that once a week is not worth it.
- Aim to compound once a week.
- Taking a few weeks off for vacation will have a very minor effect on your overall performance. Leave your computer at home and relax!
For deeper dives on Elephant Money, please check out Part 1 and Part 2 of my series!
My Twitter, Youtube, and Telegram links are posted here. I will not DM you first: https://linktr.ee/dripstrategy
If you enjoyed my article about Elephant Money, I would appreciate if you used my HERD partner address to sign up: 0xa5254C2Ad5a59e716cbf015B7b910e605ee30804
Unlike DRIP, the partner address can be changed at any time, and the overall referral system is single level and similar to Amazon or Tesla’s affiliate system.
Thanks and have a nice day!
-DripStrategy
