This one has been drafted last year. 😆 I think I wanted to write this even before the rise of smartbch. And it seems like it is the appropriate time to published it.

The purpose of this article is to solve the current confusion with smartbch apr vs apy interest and how to solve and compare the interest rate from different dexes, who offers the best interest rate to maximize your profit.

In my last article about learn the basic of compounding, I have mentioned there the simple interest and is somehow, relates to APR.

https://read.cash/@Meyzee/learn-the-basic-of-compounding-interest-cd89ba72

APR or Annual percentage rate.

APR is the annual percentage rate of Interest you will pay on a certain amount of loan or the amount of interest you will receive if you lend your money for a year.

How APR Works and Calculated?

The idea is that if you hold your money in a bank for a year, they will pay you with an annual interest. Some banks gave out 1.5 to 3% interest yearly. So if you have a money and you don't know what to do with it, you can put it on the bank.

For example;

A bank offers 3% annual percentage per year and you have a worth of $1000 that you won't be needing for a year. So you want to put your money in the bank, but before that you want to know how much it would earn for.

1. Daily

2. Weekly

3. Monthly

4. Quarterly

5. About a year

6. For 5 years

The daily interest of your money would be,

Apr = 3% ; Every year let's say the earth is revolving 365 days per year.

You just simply divide the annual percentage rate by 365 and that would be your daily interest.

Interest rate daily= 3/365 = 0.00821%

This means every day your 1000$ will have a profit of 0.00821%. If we were to compute it,

Interest daily = 1000*(0.00821/100) = 0.0822$

Thus your 1000$ is earning 0.0822$ everyday with the annual percentage of 3%.

On weekly interest you just multiply the daily interest for the number of days per week, or 7 days = daily interest x7 days = 0.0822$ x7 = 0.5754$, meaning your 1000$ will earn 0.5745$ weekly

On monthly let's say for 30 days (some months are 31 days, feb is 28 or 29) = daily interest x 30 = 0.0822$ x 30 days = $2.446

On a quarter basis : determine the days every month, january=31, february=28, march=31, april=30 with a total of 120 days = $0.0822 x120 days =$ 9.864

On a yearly basis you just multiply the annual interest rate = 1000*0.03 = $30

Yes that banks gave you little yield! Meanwhile, with the decentralized finance and cryptocurrency your money can earn more than 30$ with your $1000! Let's get a good example on smartbch dex. I like to use cowswap.cash because today it has really really huge apr and apy.

So what if you put your 1000$ to buy milk and stake it manually and get a 718.28% annual percentage rate? How much you would earn daily?

Same way sa above your daily interest is equals to the apr/365

= 718.28%/365 = 1.9678%

So basically, if the value of milk stabilize at your 1000$ entry

Your daily interest is equivalent to = $1000 × (1.9678%) = $19.678 per day!

If for a week the value of milk stays as it is, your $1000 will have a daily interest multiply by 7 days= 19.678x7 = $137.75 in terms of milk

Assuming that milk is stable on that price however it is fluctuating that is why, some days your 1000$ will become $900 or $1200 thus your daily interest would also go down or go up.

Meanwhile, why would I stake on just low apr when I can stake on the high apy?

This is just a preview because compounding is a broad subject. 😅

What is annual percentage yield?

The idea of annual percentage yield is the calculation of the accumulated yearly interest that is provided whether your asset is compounding daily, weekly, monthly quarterly, yearly or continuously since the day you started to put your money.

For example, your father asked to keep your 1 peso today and if you did, he'll give you another one tomorrow, and if you also keep the other 1 he gave, he'll double it the next day. And promised to double it every other day for a year. That was compounding is. The capital will have a profit and the capital plus the profit will have a profit, depending on the contract, for example daily, the daily interest will add up to the next day calculation of the interest.

And the total interest rate applied on that is what we called annual percentage yield.

The formula applied on basic compounding is the same as compounding interest, taking into account that, apy is the compounding interest of annual percentage rate.

The formula for calculating apr in terms of a given apy is,

Apy = ( 1 + APR) ^ n

So back with the above sample for calculating the apr of a given apy for auto compounding in milk, 128271.30%

Let us compare the daily interest rate by substituting the values through the formula.

128271.30% = (1 +daily interest rate)³⁶⁵

Using your calculator, we will arrived with the,

Daily interest rate = 1.98%

Comparing the apr vs apy, on the daily interest.

718.8% apr = 1.97% daily interest

128271.3% apy = 1.98% daily interest.

If we would look closely to that of the difference between the apr and apy displayed on cowswap.cash, they are almost the same in values of yield but only different on approach. One because on auto compounding you don't need to manually harvest your milk back to staking.

And it really looks attractive for investors to see that huge number.

Moreover, the case of apy on celery is different from this example as celery offers an interest of compounding continously. And it will require another set of article for that. 😅

If you have more questions, about the above statement. Let me know below!

Notes: This article is written last week so values of apr on cowswap might have drop. 😅

Thank you for reading!