Auto-Compounding

We're one of the only auto-compounders for concentrated LP positions and the only one to do it for free. Some protocols misrepresent auto-compounding and over promise on its benefits so let's dive in and demystify what actually happens with auto-compounding, when you should use it, and what makes the HPX auto-compounder so special.

The Basics

Auto-compounding means taking your fees and reinvesting it back into your LP position. The benefit is your subsequent fee earnings are bigger because your LP position got bigger! But a lot of protocols fail to mention that your losses are also bigger. LP positions can lose value, so by re-investing your fees into the LP, your fees can also experience losses. This makes auto-compounding a double-edged sword where your gains are bigger but so are losses.

When should I auto-compound?

An easy rule of thumb is to only auto-compound on low IL pairs such as stables pairs or highly correlated pairs like BTC/ETH. A more technical rule is to compare your estimated fee APY to your estimated IL percent. If the following inequality is true, then it's generally good to auto-compound.

$APY > \frac{IL}{1-IL}$

For example, if you're losing ~20% to IL over the course of a year, your APY should be more than 25% to make compounding worth it. Here's a chart to make that lookup easier. Above the line you should auto-compound, below you shouldn't.

If you're LPing into pools with greater than 35% IL, you'd really need some crazy yields to make it worth it. So crazy it'd make the chart too hard to read so I left them off.

The truly correct technical answer is actually really complicated. It requires you to model when impermanent loss occurs since it's a stochastic process and you have account for ergodicity (a fancy word for the fact that this is an iteratively multiplicative process), fun challenges if you're interested in math, not so fun if you're just trying to invest. So for now I'll leave it as this: compound when IL is low.

Predatory Auto-Compounders (Fees)

Protocol that charge you a fee every time they compound is extremely predatory and usually make auto-compounding not worth it. By compounding you still experience increased IL but now your earnings are reduced. Even if the protocol's take is small, like 1 or 2 percent of the collected fees per compound, because of the multiplicative affect of compounding this can actually make a positively earning position lose money over time.

For example, in When should I auto-compound? I give an example that you need to earn 25% in fee APY to offset a 20% IL loss to make compounding better than not compounding. But if you're paying 2% of your fees per compound, now you have to earn 31.8% in fees to offset the same 20% in IL. You have to earn 27.2% more to make this make sense! LPing is hard enough, let's not handicap ourselves even further.

Our Auto-Compounder (Free)

Fortunately our auto-compounder doesn't charge any fees and doesn't eat into your profits. The way ours works is that every time someone deposits or withdraws an LP position on our platform, all positions in the overlapping ranges are compounded in a gas efficient way. Under the hood since all positions are bucketed into group ranges, any single person operating on a group helps compound the entire group. This means the more people that use Hyperplex, the more it compounds and the better it is for everyone.

Concentrated LPs

At the point of writing this, Hyperplex is one of the few auto-compounders out there for concentrated positions and the only one that does it for free. Auto-compounding concentrated positions is usually really difficult because each position is non-fungible and must be compounded one by one. Our internal bucketing system solves this problem and can compound millions of position just as cheaply as compounding one position.

Unconcentrated LPs

Unconcentrated LP positions are usually automatically compounded by the base V2 AMM. We put full-range positions into concentrated AMMs (but still over the full price range) because concentrated AMMs get more swap volume and earn more fees, but as a result the base AMM no longer auto-compounds since it can't. So Hyperplex does it instead and of course this is also free.

But remember that sometimes its more profitable not to auto-compound (see the equation in When should I auto-compound?). With your usual basic full-range AMM you no choice but to auto-compound, with Hyperplex now you can at least choose.