Maybe you have noticed the often very high % rates shown on the pools of a farm. In this article you will learn what APY / APR stands for and what they mean in the context of farming.
A yield farm pool showing high APR’sDefinition #
APY stands for “Annual Percentage Yield“
APR stands for “Annual Percentage Rate“
Explanation in the context of farming #
In a farming context, both rates are used to show the possible reward in a pool. Compared to APR the APY takes into account the compound interest. As the rates can change with the token price and the amount of funds deposited in the pools, it is useful to calculate the real rewards yourself when entering a farm. You can find a tutorial on how to create your own excel script to calculate real yield in this article.
Taking into account compound interest means that APY figures shown will be higher than APRs, but (in the context of farming) this assumes that you will be depositing yield back into the pool. In the case of the native token, the additional yield gained through compounding is often outweighed by the loss in value of the token over time.
For non-native pools you can swap the rewards into the pool token and deposit the reward again, but you have to take into account the deposit fee, which is not included in the shown APY / APR.
If you want to understand how the APY is calculated you can use the formula below.
APY = (1 + R/N)^N - 1
R: Period rate
N: Number of compounding periods
or you try this APY calculator: https://www.omnicalculator.com/finance/apy
Now you know how to read and interpret the APY and APR values shown on the pools of a farm and can calculate your real rewards for yourself.
