Whether one is yield farming, or lending or borrowing digital assets, the terms annual percentage rate (APR) and annual percentage yield (APY) usually pop up. Let's familiarize ourselves with these terms 👇
In this article, we dive into the two common metrics used to represent returns on crypto investments and finds out: what exactly is the difference between the two?Join us in showcasing the cryptocurrency revolution, one newsletter at a time.
With a nominal interest rate of 15%, and by adding the effect of interest that compounds, John will now earn $1,607.55 in interest over the year,The effect becomes especially large over larger periods of time. If John locks his account for three years, he will make $5,639.44 in interest over the period with compounding, and just $2,479 without it.“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.
In John’s case, weekly interest payments will result in a higher APY, whereas quarterly payments will push it down.The APR is usually a given, but it can be calculated using the interest per compounding period as well. Note that the number of periods in a year can also be less than 1, in the rare case interest is paid less than once a year. The formula for calculating APR is as follows:APY is calculated as seen in the formula below.
Nevertheless, the author doubled his staked amount in the course of 36 hours. Again, these ultra-high APY farms are incredibly risky, and should not be participated in without due regard for risk.There is a time and place for everything. This is true for the APR vs APY debate as well. In some cases, APR is the more relevant metric, whereas other situations call for APY. This mostly depends on whether you are the borrower or the lender.As a borrower, you are paying off the balance as you go.
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