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.
Introducing a yield optimizer: Beefy.finance
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.
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