I've mentioned before that auto-compounders can be useful because they allow you to passively boost your yield.
But auto compounders do add additional risk.
It's important to understand this, so you can decide for yourself if it is actually worth it to use one.
Auto-compounders are often called yield optimizers as well. Some popular ones include:
They reinvest your returns from LPs or staking - usually once or more per day, to maximize the APY.
- a bug in it that causes it to behave abnormally, or
- a vulnerability that allows hackers to exploit the smart contract and steal funds.
For example, if you are farming TOMB on @tombfinance manually, you only have to worry about Tomb's smart contract risk.
But if you are using @beefyfinance to farm TOMB, then you have to worry about Tomb's smart contract risk AND Beefy's smart contract risk.
Recently @financegrim - another yield optimizer for the FTM chain - got hacked. The hackers made off with $30M, and a lot of people lost their funds.
This is not the first time a protocol has been hacked nor will it be the last.
So how can you mitigate this risk?
- Many eggs, many baskets: Don't go all-in into one cryptocurrency, but also don't go all-in into one protocol. Spread out your funds across many protocols. This is critical to mitigating your downside against hacks.
- If the APR is not very high and you can manually compound weekly, then autocompounders don't add too much value. The difference between weekly and daily compounding is pretty small unless APR is high (> 200%).
Finally, if you are going to use one, then make sure it's audited and has been around for a while.
But even @financegrim was audited, so clearly audits don't mean the project is bulletproof.