APR vs APY
What are the difference between APR and APY
APR and APY both represent an annualized return for the investor. They are both based on a recently generated return that is assumed to continue and hold constant for a year. The result, therefore, is an annualized rate of return given the current rate of return.
So, what is the difference between APR and APY? It comes down to one thing: Compounding.
APR assumes that any returns generated would be kept separate and idle, whereas APY assumes those returns are then put back to work and starts earning. The process of putting the returns back into the investment machine is what's known as "compounding".
See the following table to visualize the difference:
Data by American Express: APY vs. APR
Formula: (1+(r/365))^365-1 = APY
- Most products on Feeder uses current reward distribution that is compounded to annualize into a daily compounded APY.
- AutoFarming products also have a "Trading Fee" component which is calculated based on a historical average APR.
Please note that Trading Fee APR is not reflected by the growth of LP tokens, but the value of the LP token itself.
To illustrate, let's say a single BUSD-BNB LP token has 1 BNB (worth $600) and 600 BUSD as the underlying asset, therefore it is worth $1,200 per LP ($600 + $600). When someone swaps on exchanges, they pay a fee, and those fees are distributed to liquidity providers (represented by LP tokens). Say someone paid $600 in fees and your single LP token represents 10% of the pool, you'd immediately get $60 (10% * $100; split in half between BNB and BUSD) added to your underlying asset. Now your LP is worth $1,260, rather than $1,200; 1.05 BNB and 630 BUSD.
Keep in mind that this assumes both BUSD and BNB prices are constant.
So again, Trading APR increases the value, not the quantity of your LP.
- In some cases, where the target does not require Feeder to auto-compound, such as ACS, Feeder displays a historical average APY. Depending on the target, the length of the historical average can vary.
The APY figure on the DApp gets updated every 15 to 30 minutes.
It is important to note that APY is dynamic and changes (up or down) at all times; the following are key drivers behind the changes:
The price of the reward token getting compounded back into the deposited balance, for example:
- Were CAKE token price to rise significantly, so would the APY for CAKE related products; the same effects in reverse would take place if CAKE token price were to fall
Changes to endpoint APR due to other investors interacting with the contracts, for example:
- Lending Pools: As more lenders supply to benefit from high APR, utilization rate drops, and so does APR on the endpoint and APY on Feeder
- Swap Pools/PCS Farms: Depending on how active swapping is or how volatile the market is, trading fees are a sizable portion of the APR that goes into various products
Last modified 1yr ago