APY Guide
What is APY?
APY is the annualized rate of return from an investment, factoring in compound interest that accrues or grows with the balance. Compound interest includes interest earned from the initial deposit, plus the interest earned on that interest.
Although commonly associated with traditional savings, APY is a crucial metric for subscribing to FarmBit Pool. Investors can earn APY on cryptocurrencies by subscribing them, putting them in the pools via yield farming.
You can quickly get started earning APY on your crypto through DeFi
Typically, investors will earn interest in stable coins.
Simple Interest Rate vs. Annualized Percentage Yield
While APY refers to the projected rate of annual return gained from a pool after accounting for compound interest, a simple interest rate only considers the interest earned on the original deposit. Thus, the main difference is that APY takes into consideration the effects of compounding interest if it applies.
Compounding is a powerful investment tool since it enables you to earn additional income over time. Compound interest is calculated over a certain period, and the added value is added to the balance. With each additional period, the interest paid on the overall balance also increases.
To make it easier to understand, consider subscribing with $1,000 at an interest rate of 12% per annum in January 2021. After one year in January 2022, using a simple interest rate calculation, you’ll receive a total of 1,000 × (1 + 12%) = $1,120.
The same $1,000 staked at 12% per annum, but with biannual compounding of interest in the first six months, will give you 1000 × (1 + 6%) = $1,060, or the total after six months.
After a year, you’ll earn 1,060 × (1+ 6%) = $1,123.60
That extra $3.60 comes from the power of compound interest. Therefore, your annualized percentage yield is the return you’ll receive over the year: $1,123.6 ÷ $1,000 − 1, or 12.36%.
How Does 7-Day APY Work in Crypto?
The 7-day APY is an annualized yield using 7-day returns. It’s calculated by taking the net difference in price from 7 days ago and today and generating an annual percentage.
The formula to calculate 7-day APY is as follows:
APY = (X − Y − Z) ÷ Y × 365/7
Where:
X = the price at the end of the 7-day period
Y = the price at the start of the 7-day period
Z = any fees for the week
This calculated amount helps investors to understand the weekly yield or return.
Does APY Represent Final Earnings?
APY represents your rate of return or the amount of profit or earnings you can make. Depending on the pool duration, your ultimate earnings will differ. The asset maturity period will determine how much you earn.
How to Calculate APY in Crypto
APY measures the rate of return earned annually as a profit on any sum of money or investment after factoring in compounding.
The formula for calculating APY is as follows:
APY = (1 + r/n)ⁿ − 1
Where:
r = periodic rate of return (or annual APR)
n = number of compounding periods each year
The calculation of APY in crypto is the same as it would be in traditional finance, and the goal is similarly to come up with a percentage yield.
The APY is calculated in a simple interest format where the daily yield represents the interest rate that you can earn, depending on the number of tokens you subscribe to a pool.
The formula is as follows:
Daily yield = The number of total tokens subscribed × (Pool APY ÷ 365)
For example, if you’ve subscribed 10,000 FMB for guaranteed APY at 40% in stablecoin, you can collect 10.9 BUSD the next day. The calculation is represented as 10,000 × (0.4 ÷ 365) = 10.9 BUSD.
N.B: Assuming 10,000FMB is equivalent to $10,000 BUSD.
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One Last Example
You have $1000 A and subscribed it in Pool X with $1M pool value and 10% APY.
Pool X puts your asset in a business bX for a specific time ( asset maturity)
Business bX has a trade invoice that entitles them to $1M at some point in the future for product or service rendered. This means your asset will receive $100 at Asset maturity.
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