Know Your Crypto Lingo - APR vs APY

There are two terms in the DeFi space that tend to confuse the sht out of everyone and those terms are APR and APY.*

Everyone uses these two for their own advantage and if you ever had a closer look at a bank loan you will know what I am talking about. When they are lending you money they use APR and when you are lending money to them through saving they are using APY. Why is that?

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APR - Annual Percentage Rate

In DeFi, APR refers to the yearly profits one would make without compounding their rewards. In other words, if a farm of protocol offers 10% APR on your Bitcoin deposit, if you deposit 1BTC today and leave it there for a year, you will have 1.1 BTC at the end of that year (if the rewards are paid out in BTC).

The difference between APR and APY is actually huge and should be understood by every farmer out there. An APR of 1k% can lead up to an APY of few million percent, but those numbers are almost always misleading.

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APY - Annual Percentage Yield

Unlike APR, APY calculates your yearly profits based on an assumption that you will compound your earnings consistently for a span of one year. In crypto terms, you are harvesting and compounding all of your rewards at least a few times a day.

Using ARP and APY in Farming

There are a lot of bad people out there and they all want one thing - your money. When these bad people deploy new "farms" they will use ARP and APY percentages how they see fit and intentionally mislead their potential investors.

For example, you may see millions of percent in APY on a farm that requires you to pool Token X with something more stable like ETH or BTC. When advertising this farm they will say something like "Hey! If you put your Bitcoin in our shitty farm you will get ONE MILLION APY instantly!". A lot of people fell for these in the early days and they still do.

The problem with this is that token X will most likely perform a nosedive in terms of price because you aren't the only one farming it. Those that know how these things work will keep selling and dropping the price down, in turn causing your profits to go down instead of up. On top of that, your impermanent loss will become very permanent and there is no going back once the job is done.

Reputable projects like CubFinance will use ARP as a standard metric, because that is the only number that should interest you as a farmer, and they all know that.

Calculating Actual Returns

There are two simple ways to do this.

Almost every farm right now has a calculator icon beside the APR/APY numbers. Click on it and don't look at percentages, look at "token per $1000" and do the math on your own. This is a lot easier because in crypto it is easier to visualize profits in the number of tokens you are getting. If you are planning on accumulating this is the way to go.

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Another, more accurate way is to calculate the average ARP by doing weekly calculations. If you started farming on Monday, next Monday look at the total rewards you got in one week and write that down. Do this for 4 weeks and calculate the median return rate on a weekly basis. This way you will know what to expect next month, next week and even tomorrow.

You can always rely on the numbers shown on the website but they are constantly fluctuating. If the price goes up, percentages go up as well but that doesn't change the number of tokens you will be getting. Since returns are almost always calculated in USD, you will constantly get inaccurate data and probably have unrealistic expectations because of that.

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