Investing Terms % APR versus % APY

If you are farming or staking cryptocurrency you often encounter the rewards yields in terms of APR or APY. We are going to look through the difference between the two and which is better?

Annual Percentage Rate (APR)

The APR is the rate of return in a year excluding compounding interest. This can be assumed as the principal times the APR equated to total you get at the end of the year if you invested.

Example. A stake has 10% APR. You put $100 into the vault and lock it up for a year. At the end of the year you have $110 in the vault for withdraw.

Annual Percentage Yield (APY)

The APY is the rate of return in a year including compounding interest. This gets interesting if the compound is daily versus weekly or monthly. The interesting part is the more often interest is compounded the more earnings.

Go back to the prior APR example. If the stake rewards can be compounded monthly the APY is 10.47%. This means at the end of one year:

$100 x 10.47% = $10.47 earned. $0.47 more than APR

If the rewards can be compounded daily the APT is 10.52%.

$100 x 10.52% = $10.52 earned. $0.52 more than APR

In summary it is ideal to see APR when you look for yield rewards because your earned interest that comes out in liquidity daily can be reinvested into the pool to create the compounding interest. APY will rise the more often you are able to compound.

Below are the equations to derive APR and APY courtesy of aprtoapy.

APR = [(Fees + Interest)/Principal] x (Number of Years) x 100

APY = [1 + (APR / Number of Periods)]^(Number of Periods) - 1

Note the APR introduces both fees and interest. Some farming pools will also reward liquidity providers with swap fees and token rewards. This is interest on top of interest so summing both the fees and rewards interests will obtain the exact APR.

Hive Liquidity Pools

https://beeswap.dcity.io/swap?pools

The Hive pools can be found in link above. Take a look at the first example of SWAP.HIVE : BEE the APR is currently 15.022%. Liquidity providers will earn daily rewards that includes some BEE. If they plan to invest the BEE rewards and additionally provide SWAP.HIVE at 50%/50% weight the provider will essentially be compounding their earn interest which will make their APY be higher. Their toward rewards will be based on APY.

Conclusions

The higher the APR the greater the APY if interest is compounded. You want to see some magically match. If a liquidity pool was to provide a yield of 80% APR the yield in APY, if interest is compounded daily, will then be: 122.36%. That is over 50% additional earnings if investor compounds the interest daily. So now you maybe asking yourself, are there not smart people who can create pools that automatically compound daily interest rewards back into the pool? The answer is of course!

My favorite auto-compounding protocol is Beefy Finance. It has an array of blockchains and some of the most popular liquidity pools on multiple protocols. Snapshot below is some of my favorite pools that I am personally invested in on Fantom blockchain.

The pools are on Spooky Swap but Beefy Finance will auto-compound the daily rewards if investor places their funds through Beefy Finance. This is the magic behind higher APRs resulting in even greater APYs. Okay not exactly all magic, it the power of compounding but it sure looks magical ;)

None of what I write is financial advice. It is for entertainment purposes only. Thanks for reading!