APR, APY, Compound Interest
What is APY? What is the difference between APR and APY?
APR stands for annual percentage rate. APY stands for annual percentage yield.
APR would mean, your earnings not compounded. It is the annual rate eanred through an investment. APY is the real rate of return earned on an investment taking into account the effect of compounding earnings.
Yield farms often state x% APY. If this yield farm does not compound your earnings, this x% is not real. It would actually be APR, and the % would be different from what they state.
Vaporwave Finance calculates our APY through the price of the reward Token (TRI, PAD), the rate of earning that reward token, the price of your intended want tokens (e.g. ETH-USDC) and the number of compounds per year.
Our APY is a REAL figure.
Binance Academy has a good article on DeFi. Learn more here.
Why is the APR on vaporwave different from the APR on _____farm?
We likely calculate APR differently. They have their own way to calculate APR. Some farms include an estimated daily compound system to show a higher number. Others dont. Either way, APR and APY will always be an estimation. Why? Because it is an assumption on the future.
How do we calculate APY?
price of reward token
pool allocation for that reward
pool weight (total liquidity), so the ratio of all pool rewards among all liquidity
price of rewards per year
compounds per year.
Numbers 1-4 above is the basis for APR. Number 5 is how we estimate APY.
Looking at the 5 points above, any one of these can change. This is why APY will always be an estimate, and users should be careful not to assume a pool that says “500%” APY will always be that amount.
The Power of Compound Interest
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