Untangling two most misunderstood concepts in DeFi
What are APR, APY? What about Base or Rewards APY? 🤔
Ever wondered what APR and APY really mean in the world of descentralized finance (DeFi)?
If so, you're not alone; many confuse these two crucial terms. 🤫
🤔 What is APY?
APY (Annual Percentage Yield) is crucial in DeFi. This percentage of return accounts for compound interest applied repeatedly throughout the year to the initial investment.
This calculation shows how your investment can grow with the reinvestment of earned interest.
🤨 And what about APR?
On the other hand, APR (Annual Percentage Rate) represents the annual return without including compound interest.
At first glance, this seems pretty straightforward, right?
What many do not know is that APYs in DeFi can be misleading…
APYs are not static in DeFi;
They are constantly recalculated with factors that change over time.
For example, as more money flows into a protocol, the "Total Value Locked" (TVL) increases, which generally lowers the APY.
And conversely, less money results in a lower TVL and a higher APY.
🧠 The Reality of APY in DeFi
Often, the percentage return of these APYs is "artificial."
APYs can be divided into two types:
👉🏻 Base APY: The actual yield coming from fees for using the service.
👉🏻 Reward APY: Yield that is subsidised by token issuance, which can dilute the token's value and negatively affect its price in the long run.
☝️ Key Tip
Always pay attention to what the real yield is when using DeFi products and consider that rewards are temporary and part of the incentives in the DeFi game.
Those tokens might look good, but they are usually fresh new tokens entering to the market!
Use this site to understand the yields in DeFi, which ones are the Base and the Reward APYs.
Have a great week!
See you next time! 👋🏻