“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.”
Q. ‘Why don’t I just hold ETH?“
“All this seems so much work!!’
A. Because of Compound Interest!
That’s it, that’s all you need to know!
‘I don’t believe you, I need more info!’
Alright you asked. Here are the details.
In the short-term if ETH spikes (increase in price) then this strategy may not be worth it. However, this strategy is sacrificing the ETH bull case for that of the Compound Interest case. If you do the math on compound interest over 5/10 years, this beats - by far - even the most bullish of ETH cases.
A short term ETH bull run, you’ll lose on Impermanent Loss. There is no escaping this.
Long Term no matter the ETH case; COLLECT FEES AND COMPOUND IT (COMPOUND INTEREST) because:
ETH Bear case - collect fees
ETH Sideway case - collect fees
ETH Bull case - collect fees
In essences, you are trading uncertainty of the ETH case for certainty in math (compound interest).
‘Prove it to me with math, please!’
Alright, Nerd. You see the picture at the top. We are going to use this formula for compound interest along with some assumptions to calculate your future treasures.
In addition, this strategy may only be viable if you are putting in a significant amount of capital. This ensures that the collected fees outpace the fees you pay in repositioning and compounding. Generally, a $20K liquidity pool is a good starting point.
UPDATE 9/28/2021: IMPORTANT NOTE
The fees on Layer 1 (this strategy) has become a significant barrier to entry due to the congestion of the Ethereum Network. As more and more Layer 2 solutions come into maturity, we may want to move our capital to these pools - THIS IS STILL IN RESEARCH