Understanding Crazy Crypto Yield Percentages: APR vs APY - The Power Of Auto-Compounding Explained

Edit: This is an older article I published on publish0x.com. I find it still useful and hope it provides some value to you. This was before the big crash of Iron.Finance. Enjoy :)

Have you ever wondered how these extremely high percentages on Yield Farms work? Can that even be sustainable? In this blog I want to explain the difference between APR and APY and the beauty of compounding percentages.

In short: APY is the real rate of return on an investment and  takes into account compounding earnings, APR does not.

I really started to understand compounding and it's exponential effect after reading the Beefy Docs. If you get 100% return per year, you will have 8 times your initial investment after 3 years.

growth = (1 + r)^x where r = return and x = number of times.

Examples

Okay, enough with the theory. Let’s look at an example. This is the TITAN/MATIC Pool on Iron.finance:

They correctly state APR, because an investment in the pool would leave you with 1332% more after a year as they are not auto-compounding returns. You have to manually harvest all the returns. You can think of your deposit and the returns as two different pools.

Introducing a yield optimizer: Beefy.finance

As you can see the APY is in the crazy Millions Percent. The daily * 365 equals to 1,434.45% which is much closer to the underlying farm. The difference can be explained with Beefys compounding strategy.

Cryptocurrencies allow to pay out returns on investments not on a monthly or daily basis, but per block. This means there is much more room for auto-compounding gains to be maid.

Just be careful, many farms and projects mix up APR and APY. I hope I made sense here. Let me know any questions or comments down below.

Cheers,
n1ce