Today’s topic is a bit short and boring. It is all about APY and APR. But these two terms are actually rather important especially if you are looking into generating passive income from your cryptos – be it lending or being a liquidity provider. You need to understand the difference between these two to get the most out of your earning interests.
First of all APR – it stands for Annual Percentage Rate. Basically this is what you get from interests or staking your tokens and it is the return. So for example you stake 100 ADA which has a APR of 10%. So in one year, you will get back 100 + 0.1*100 = 110 ADA. The 10 extra ADA is the return in staking. The same goes for interest. It is that simple. That is why is it also called simple interest.
Then for APY – Annual Percentage Yield meaning that the returns will include the compound interest. So it is like APR but includes the additional interest you get from those compound interest as well. So for example if you put into a DeFi lending platform 100 ADA and it has an APY of 10% and gives you interest daily. So on the first day, you will get 0.0273972 ADA and you increasing amount of ADA till the total of 110.51 in one year. So you get an extra of 10.51 ADA as compared to the APR. This means that you are reinvesting your interest rather than taking it out as profit.
But wait guys, do you know what that means? It means that an APR of 10% is actually better than a APY of 10%, even more so when we are talking about earning with compound interest which is paid daily.
There are a good number of ways for crypto investors to make money from yield farming. And some of the APYs are pretty crazy. Some even with 300-400% APY! However do understand that these yield farming do come with some risks. I would never recommend anyone going into these kind of high APY farming without first understand who it actually works and the risks involved. So please do your own research. And know the underlying fundamentals of the protocol behind the yield farming.
Some of the popular yield farming platforms are Curve Finance, Pancake Swap, Beefy Finance, Uniswap, Venus and many more. Again, I would like to remind readers to do your own research. And if something sounds just too good, you might want to give it a pass.