By using auto-compounding, you can earn higher APY by automatically selling your yield farming rewards and re-adding them to your pool. Here’s how and when to do it.
Entering a farm #
Step 1 #
You should use a decentralized exchange (DEX) like TraderJoe or Pangolin. The majority of pools require you to put in 50/50 of the tokens you plan to farm with. Choose two tokens that you will hold for a long time.
For example, if you have 1 AVAX and you want to enter the AVAX/JOE farm, you would need to swap half your AVAX for Joe.
Do Make Sure To Always Have Some AVAX In Your Wallet In Case of Transaction. Instead of swapping 0.5 AVAX for JOE, you want to do 0.4~ AVAX.
Step 2 #
Look for the token that you will be farming on the pool’s page.
Click into the pool of interest. The first time you use the pool, you may need to approve its contract.
When you hit ‘MAX’ on the JOE token, you will receive LP tokens as a “receipt” for the amount you deposited. There are going to be differences per DEX, but for traderjoe they are called JPL. The contracts track them, and the data is on the blockchain and will not be lost, so don’t worry about not seeing them in your wallet.
Step 3 #
To find the AVAX/JOE farm, you would go to the Farm page and search for JOE. However, this article is about auto-compounding, so we’ll want to head to YieldYak instead.
Verify that the platform is the correct DEX (Trader Joe) when you find your token pair.
Click ‘your account’ to access this section where you can DEPOSIT your JLP.
Tokens in the pool are summed up in the FARM TVL in the top right. In general, pools with low TVL are riskier than those with high TVL because many people do not swap for those tokens.
If you have low swaps, your pool will not rebalance frequently, meaning your tokens might be valued lower than market prices. Your tokens are also more volatile. Choose pools that have sufficient TVL.
TVL represents the dollar value of your two tokens. You can hover over to see the token breakdown and the number of your LP tokens. In the long run, the dollar amount will always fluctuate, but if your LP tokens go up, you know your total token number is greater than you started with.
By just farming on their DEX instead, you would earn a higher APR by merely accumulating interest.
The APY on the right represents the amount you earn when Yield Yak claims the rewards on your behalf, sells them for the tokens in your pool, and deposits them for JLP. As your tokens constantly rebalance, you usually end up with more than you started with for both tokens when you add the JLP to your balance. APY and markets prices will affect this. JOE’s value affects the APY in this case.
Exiting a farm #
Step 1 #
In this example, we’ll focus on exiting YieldYak rather than withdrawing from the DEX.
Open up your account and find the Withdraw Tab and Click the Withdraw button and select 100%. Your wallet will now receive the JLP.
Step 2 #
Then go back to TraderJoe’s pool page, and click the “Remove” tab.
As soon as you approve the contract, both tokens will be deposited into your wallet.
Step 3 #
In the swap page, you can swap the JOE back for the AVAX, or you’re done.
Considerations for Strategy #
Surely an auto compounder would earn you a higher APY if it sold rewards for you?
Well, not quite. Let’s look at two possibilities
- The reward token, JOE, costs $1
- Two weeks have passed, and you have not compounded
- Suppose you have a bag of JOE and the price skyrockets by 500%
You earn more JOE in this scenario because the price is low, and if you sell at the top, you will make the most money
- JOE costs $1
- During the next two weeks, you will auto compound
- The price swells by 500% while you have no joe in your wallet
Despite having more JLP, there would be less AVAX/JOE than in the first scenario if you were to manually compound.
Conclusion #
Despite being a very powerful tool, autocompounders shouldn’t be treated as an afterthought. Be aware of the pros and cons of the token pair and factor the risk into your decision.
References Websites:
https://traderjoexyz.com/#/home
https://yieldyak.com/
