Hello everyone! We are back again today with another edition of Splinterlands Economics - a series in which we introduce a basic economic concept and then apply it to Splinterlands. If this is your first time reading, just to tell you a little bit about myself: my day job is in an unrelated area but I consider myself a little bit of economics nerd - I read a little (or maybe way, way) more news than I should, double majored in econ, and am obsessed with optimization. I love the way Splinterlands is equal parts card game and resource allocation game. My goal with these articles is to share a little bit of what I know with you all.
Our subject this week is a big one, and bridges both economics and finance. Over time, it can be a low effort way to make you rich. Albert Einstein (allegedly) even said that it's the most powerful force in the universe! Okay, enough build-up, if you were paying attention to the title you already know - today we'll be talking about Compound Interest! It's a simple concept, but one that is easy to forget if you haven't recently taken a personal finance or math class. Want a refresher on what it is, and how to get that snowball rolling? Read on!
What is Compound Interest?
As previously mentioned above, compound interest is not a complex concept, it's the idea that when you start off with some amount of value that accumulates interest or returns over time, if you keep reinvesting that interest along with your initial investment then your total value will quickly grow. In fact, you'll see exponential growth! All you need is a bit of time to let it do its work.
How quickly? Well, a fairly close approximation is the rule of 72 (in fact, using 70 would be slightly more accurate, but 72 usually makes the math easier). Take some time period, and the amount of interest or the rate of return that you would make over that time period. Then, divide 72 by the interest rate in order to approximate the number of time periods required to double your initial investment. For example, a savings account earning 6% interest per year (I know, I know!) would take approximately 72/6 = 12 years to double in value.
Now here's the magic (ooo!) part - in a second time period your value doubles again. But this time not only does your initial amount double, the additional gained value ALSO doubles. Again, not a groundbreaking concept. But at the end of the second time period (24 years) you'll have not 2, not 3, but 4 times your initial investment. You can see now why it is important to start saving for retirement early. In a world where the stock market has an average historical rate of return of around 10%, starting to save now instead of in 7 years could mean that you retire with twice as much of a nest egg!
How do we apply it to Splinterlands?
Splinterlands is, in large part, an economic game. The ways in which you allocate and utilize your resources will make a dramatic difference in how your assets accumulate and/or grow over time. There are countless ways to take advantage of compound interest in Splinterlands. Remember that taking advantage of compound interest requires two things. First, being able to earn a return on something. And second, being able to reinvest that return to earn additional gains on those extra resources.
Do you play ranked matches on the ladder? You can reinvest your earnings in more cards to move even higher up the leaderboard next season and win more DEC. Are you renting part of your collection out? You can use your rental income to purchase even more cards to rent out on the market. Are you collecting SPS from daily airdrops? Well, you can stake those (or add them to LPs) in order to earn even more SPS tomorrow! Heck, if you are blogging and have some SPT sitting around, you can even make sure that you are using your upvotes (or delegating to monster-curator) so that you are earning your curation rewards, and use those rewards to increase your SPT pile moving forward. If your goal is to maximize your account value, you should look at every asset you have sitting around and try to put it to work in some way.
In addition to earning a return at all, another important thing to do is to make sure that you are earning a good (i.e., high) rate of return. Doing checks to confirm that you are renting your cards out at the market rate and climbing the ladder as high as you can increase your rate of return and dramatically improve your gains over time. Finally, remember that reinvesting those gains and compounding more often will also increase the rate at which your capital grows. No need to go overboard and empty your RC (e.g., by claiming SPS every time you have .001 bits of it), but reinvesting once a day, or even every few days, will get you the vast majority the maximum possible.
Why should we care?
The immediate impact in our favorite(?) game should be obvious - taking advantage of compound interest whenever you can is the quickest way to building a Splinterlands empire. That isn't to say that it will happen overnight, but once you get that snowball rolling it will (most likely) just keep getting bigger and bigger. All it takes is some attention to your returns and patience.
Understanding compound interest will pay enormous dividends outside of Splinterlands too. Once you know the power of compound interest you can set yourself up to take the most advantage of it. Personally, I started saving as early as possible, set up automatic contributions for my retirement accounts, and only check my portfolio occasionally so I don't get tempted to fiddle with things too much (NFA, but these are steps that I strongly believe in). It will work differently for everyone - figure out what works best for you!
Thank you so much for reading all the way to the end. Interested in seeing some more of my writing in the future? Be sure to give me a follow! In the meantime, if you'd like to see some of my recent posts:
A Spider Beside Her...I mean Forgotten One - Using Lava Spider in Battle! - This week's battle challenge, featuring Lava Spider!
Splinterlands Economics: Credibility - An introduction to Credibility, and insights it gives us into Splinterlands.
Splinterlands Economics: The Gini Ratio - An introduction to the Gini Ratio, and insights it gives us into Splinterlands.
Thinking about giving Splinterlands a try but haven't signed up yet? Feel free to use my referral link: https://splinterlands.com?ref=bteim, and be sure to reach out to me if you have any questions!