# How do you calculate optimal compounding frequency?

Say you have 20 drip that earns 1% a day, according to my calculations(which could be wrong) , you will make more by compounding every month than every day or week over a 6 month period. But is there a formula to calculate optimal compounding frequency to the day. I realise this frequency will change but that’s not a problem.

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### 2 thoughts on “How do you calculate optimal compounding frequency?”

1. Compounding interest works the same as in any other investment, you can use this calculator and experiment with different frequencies: [https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator](https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator)

In general the more often you compound the more you’ll earn but there’s a cost associated with every compound (transaction costs). Here’s the formula for that:

APY = principal*(1+APR/n)^n – n*tx_cost

n is the number of times you reinvest your earnings in a year.

Example of a \$1000 investment with 20% APR, \$20 tx cost and no reinvestments of profit:

1000*1.2^1-1*20 = \$1180 (1200 principal + earnings, -20 tx fees)

Now let’s compound once a month:

1000*(1+0.2/12)^12-12*20 = 979.39 (1219 principal + earnings, 240 tx fees)

As you can see in this scenario reinvesting too often loses money as transaction fees eat into our profits.

For chains like Ethereum compounding make sense only if you have large enough capital to offset transaction fees. For chains with low transaction fees you can compound as often as every hour.

These calculations assume that you’re paying the tx cost for every reinvestment. Auto-compounding protocols let people cooperate and reinvest each-others’ earnings so that the average tx fee per reinvestment is much lower.

2. 