You might have came across terms like APR & APY in the financial and crypto investment sector and you wonder what this really mean. A lot of just jump on and invest in digital and crypto assets without assessing the reasons behind the APR and APY's being offered. Lets first look at what these 2 terms mean before we asses the possible reasons for those.
What is APR & APY?
APR is the short abbreviation for Annual percentage rate and it is the interest rate earned by investors for lending out their money or the interest offered by the borrowers to the lenders for borrowing their crypto assets and these rates are charged annually
APY is the short abbreviation for annual percentage yield and it its the interest rate earned on an investing and this involves the compounding of the earned interest.
Low Annual Percentage Rate/Yield
The above picture is of an investment dashboard showing low APY's and APR's of another crypto lending and borrowing platform. The reason for those small APR/Y rates is because the digital assets to be invested upon are Stable coins and are not volatile meaning there are no or less risks such as impermanent losses.
If you check on each assets there is another small APR rate just below the APY rate which is for investors who are lending out their assets. Then there is a stable APY if you are borrowing and it is higher as compared to variable borrow APR. In stable assets investments the APR and APYs they are always low as compared to volatile assets.
Higher Annual Percentage Rate/Yield
The below picture shows the crazy APY's for borrowing on a certain Farming platform. The APY's are juicy and so tempting, but not everything that glitters is Gold. I am not saying higher APY's are not good but i am just saying they don't just come on a silver platter. Mostly they are accompanied with impermanent losses but if you are fortunate enough you will make a living from these. As for me um not a big fan of investments assets which are accompanied with impermanent losses or just skeptical to these higher APY's. Mostly digital assets with higher APY's move in pairs, e.g on that picture we can see that the pairs are 2.
Other reasons which lead to Higher APR/Y
Well not every higher APR/Y is accompanied with higher risks, there are some reasons which will lead to assets being tagged with higher APR/Y. These reasons include a new project with less investors and low capitalization. On this if the investors are required to stake their tokens you might want to offer them something huge to convince them to stake their assets. Also this is done so that if more of them stake it will attract a huge number of investors and with time that APR/Y will be reduced once the investor base is improved. Higher APY's will convince the investors to stake their tokens for a long period without disposing them and this will help stabilize the project because there will be less dumping of tokens.
Also take note that low APR does not mean a project is safe, some might offer low APR's so that the investor will be forced to invest more and if there are a possibilities of fraud, the fraudsters will run with large sums of money due to big investments from the investor.
Lower APY's are sustainable for the project and mostly the project last longer and higher APY's also contribute to the sustainability of the project due to less dumping but normally this is for a short period of time. So as an investors its good to try and see the project at a bigger picture in relation with APY and APR's.