Calculating Leveraged Yield Farming Returns
Want to know how much you are likely to earn from your farming position? With all the different calculations it can be difficult to tell, and in crypto, due to the volatile nature of the market, returns can change quickly due to rises and falls in the prices of tokens.
Despite this, it’s still worth understanding how your returns are calculated, and it will give you an understanding of what you’re likely to receive.
Both APY and APR are used to calculate the annual rate that you will earn if you have invested money, or that you will owe if you have borrowed money.
APY = Annual percentage yield. This calculation takes into account compound interest. This means that the longer you leave your money invested, the greater returns you get, due to the fact that your profits are constantly added to your deposit, itself gaining interest.
Knowing how often a position is compounded is very important as it shows you how the APY is reached.
APR = Annual percentage rate. This calculation does not take into account compound interest and gives a flat rate of return that does not change.
Crypto projects will usually calculate your return in terms of APY, and PembRock is no exception. With our auto-reinvest feature, farming rewards are compounded.
So how does this look in a real-life example?
Firstly, if farming a token pair advertises ≈ 140% APY, things aren’t as simple as dividing that 140% by 12 to calculate your monthly earnings.
For example, a 140% APY may represent a 90.6% interest rate that is compounded monthly, or an 87.65% interest rate compounded daily.
Principle investment of $1000 — APR 87.65%
Difference between APR and APY
Principle investment of $1000 — APY 140% (87.65% interest rate)
An APR of 87.65% with a $1000 investment held for one year would deliver a total of $1,876.5. Each day would net you a flat $2.40 in profit.
With the same principle investment, an APY of 140% (compounded daily) would also net you $2.40 in profit on the first day, but this would then be added to your $1000, meaning the next day you would earn 87.65% on $1002.40, and so on.
By the end of the year, your compounding interest will deliver you $2400, a difference of $523.5.
As you can see, compounding interest is a powerful tool. While gains may start relatively small, earning interest on top of your interest can lead to great rewards if you keep your investment in for a decent period.
While yield farming is associated with short-term gains, we aim to give you a user-friendly secure platform along with educational tools, so you can profit over the long term!
In the meantime, you can play around with two cool tools for looking at the difference between APR and APY and seeing the difference between returns using different interest rates, compounding periods, and other parameters.