It is important to understand and compare crypto APY when investing in DeFi to spot the best investment opportunity. The simple math behind APY, how it works, and the best way to use it is explained in this article.
What is APY?
Annual percentage yield is the exact interest rate paid on an investment when the compound interest earned for every period is added to the principal before calculating the next return. The interest earned after the initial investment increases the balance, which forms the basis for future calculations.
The process is repeated throughout the investment period to get the final amount after a year. Crypto APY paid in liquidity pools is variable and tends to decrease as the number of investors increases. The decrease results from so many people sharing in the rewards that used to be distributed among a few investors.
It is calculated using the formula:
APY = (1+r/n)^n – 1
While the final yield, X on the amount invested, is given by:
X = P(1+r/n)^n
Where:
APY = annual percentage yield.
r = rate during the period.
n = number of compounding during the period.
P = principal or initial amount invested.
Assuming you invested $500 into a yield farming protocol that pays 30% APY, your final return amount will be given by:
$500(1+0.3/1)^1
= $500(1+0.3)
= $650
Why is It Relevant in Crypto?
If you have been in crypto long enough, you must have witnessed the Olympus DAO era, where projects offered insanely high APY. The original project came up with the idea of long-term staking based on the principle of the community staking effect. As long as everyone in these communities committed to staking their earnings, the collective wealth continued to grow. On the contrary, many investors didn’t commit long-term to the project, leading to a fall in the token’s price.
The high APY attracted many initial investors in Olympus DAO and the hundreds of forks that emerged on other blockchains. Since they found the insane numbers impressive, they delved in and started investing, which led to the astonishing growth of the DAOs.
The point in the Olympus DAO story is that APY is how crypto projects communicate the value they offer to their investors. When investors discover a project with a high APY, they get interested and will likely invest after further research if they are a bit conservative. That is why you often find the APY on the yield farming tab of most DApp websites.
APY also helps DeFi projects show transparency about dealing with their investors. If you visit a DeFi website and there is no display of the amount you will earn from investing X amount, you may leave the website. The thing is, investors, want some level of transparency in all aspects of a project to start believing in the ideas of the project.
How Can You Use APY To Your Advantage?
Even though a calculator comes so handy today that there seems to be no reason to calculate manually, understanding how APY works can offer a lot of advantages. The first obvious one is the ability to spot high-yield opportunities by looking at the APY.
Furthermore, finance professionals often look at the APY to determine the most profitable of two investment options. The APY rationale for a profitable investment is often the logic for most financial calculations in finance textbooks.
By understanding APY at a fundamental level, users can calculate to determine the most profitable from two separate liquidity pools on the same platform. A good understanding of the concept of APY will also help investors access multiple DeFi platforms to find the best platform to invest in low-risk yield farms for stablecoins.
Enjoy High APY on Pandora.digital
Farming APY on Pandora helps users decide the best option according to their risk tolerance and speculative preferences. To ease the process for users, there is a calculator icon just by the APY amount that can help with all the math in this article.
After visiting the official website, you can leave your cursor on the Earn tab and scroll to the farming page. Many high APY farms and stable yield options exist in various stablecoins. You may notice a drop in the APY on certain yield farms, but it is so on all platforms since the amount paid out tend to decrease as the number of investors increase.
Aside from yield farms, Pandora offers earning opportunities, rewards, and investment products. On the top of that list is Pandora NFT Security, an investment product that outperforms traditional bonds in many ways. Aside from being the first decentralized security issued and backed by real investment. An NFT Security is one of the most flexible investment assets you can come to think about.
Users can invest from anywhere and stake their NFT Security to earn double returns from a single asset. With an APY of around 12% and an APR of up to 300%, Pandora NFT Securities remains unrivaled. You can check out and become eligible for other opportunities on Pandora by upgrading DroidBots, unlocking NFT staking slots, trading on the PandoMarket, and buying a jackpot ticket for just $1.
Conclusion
In summary, APY is one of the simple yet tricky concepts in DeFi. The calculations are, however, simple, and the utility is straightforward. Using APY, investors can decide faster and more efficiently about the best DeFi platforms and pools to invest their money. Platforms can also show transparency and win investors’ trust by displaying appropriate returns on investment over a year on the user interface of liquidity pools.
Crypto traders can leverage APY to make a profit through borrowing and re-lending. If one platform pays a higher APY than another on stable assets, for example, a smart trader can borrow funds from one pool or platform and reinvest it to earn profit. Such discrepancies in APY can also form a part of a formidable hedging strategy. Since it is possible to earn a higher APY on different platforms, traders can keep their crypto as collateral on lending platforms to reap the gains of increased prices during a bull market while profiting from the borrowed funds.
Sustain your finances with Pandora – your favourite DeFi companion!
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