Understanding Crazy Crypto Yield Percentages: APR vs APY — The Power Of Auto-Compounding Explained
Have you ever wondered how these extremely high percentages on Yield Farms work? Can that even be sustainable? In this blog I want to explain the difference between APR and APY and the beauty of compounding percentages.
In short: APY is the real rate of return on an investment and takes into account compounding earnings, APR does not.
I really started to understand compounding and it’s exponential effect after reading the Beefy Docs. If you get 100% return per year, you will have 8 times your initial investment after 3 years.
growth = (1 + r)^x where r = return and x = number of times.
Okay, enough with the theory. Let’s look at an example. This is the TITAN/MATIC Pool on Iron.finance:
They correctly state APR, because an investment in the pool would leave you with 1332% more after a year as they are not auto-compounding returns. You have to manually harvest all the returns. You can think of your deposit and the returns as two different pools.
As you can see the APY is in the crazy Millions Percent. The daily * 365 equals to 1,434.45% which is much closer to the underlying farm. The difference can be explained with Beefys compounding strategy.
Cryptocurrencies allow to pay out returns on investments not on a monthly or daily basis, but per block. This means there is much more room for auto-compounding gains to be maid.
Just be careful, many farms and projects mix up APR and APY. I hope I made sense here. Let me know any questions or comments down below.
None of this is financial advice. Please always do your own research.If you would like to support my work, consider using the following affiliate links:
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