In this post we consider a simple way to convert a DeFi project APY to a ROI on a lock-in period (LP).
Such conversion is required when we need to compare ROIs from different investments opportunities on the same time interval.
Suppose that a DeFi project APY (annualized percentage yield) is 36% and a minimal lock-in period is one month. The project is risky and we want to minimize risks by investing only on the minimal period (one month). A simple way to convert an APY to one month ROI is to use a free tool “ROIcalc” available at https://www.ispreport.xyz/utools/oascalc/roicalc.html.
We enter the number 36 into the field “APY”, select the lock-in period -one month, and click on the button “Show the ROI!”. The result is displayed below the button, on the right side.
In our case the ROI= 2.5955%. As we can see, the ROI is lower than the APY. To receive a ROI (per year) equal to the APY we need twelve times reinvest our assets (with accumulated ROIs) and at the end we will get a ROI per year equal to the APY. Keeping your assets in risky projects for a year is a very risky strategy even for those who is favored by the “Lady Luck”. A more prudent approach is to reduce your exposure to risky projects to minimal possible time intervals and keep the majority of your assets in safe wallets/accounts most of time.
Now, suppose that we want to compare ROIs from different DeFi projects and one investment opportunity outside of DeFi, with ROI=4.5% on two months interval. For simplicity, let us assume that all opportunities have the same level of total risk on two months interval. A DeFi project A has an APY=29% with the minimal lock-in period one month and a DeFi project B has an APY=31% with the minimal lock-in period of two months.
For the project A we can find that a two months ROI is equal to 4.3354%,
and a month ROI is equal to 2.1447%.
For the project B we can find that a two months ROI is equal to 4.6%.
If we can tolerate risk exposure for two months then the best option is to invest in the project B, because in this case we have the highest ROI for the same level of risk (two months exposure to risky projects). If we want to limit our risk exposure to one month then we should invest in the project A.
To find info on high risk dApps see these links:
https://www.dapp.com/dapps/high-risk
https://www.bitdegree.org/crypto-tracker/top-dapps/high-risk
In the next post we consider a simple way to estimate risks of DeFi projects.
