The Calculation method in Yield Farming Returns

Two methods are used to calculate Yield farming Return. One is Simple interest based another one is compounding interest base (reinvested on daily basis).
Name of these two are-

• APR (Annual Percentage Rate)
• APY (Annual Percentage Yield).

APR means the total return on investment after a year in simple interest basis. It’s pretty simple interest calculation technique we use in our day-to-day life like return on investment in percentage of the year.

• APR Calculation System
  APR = (Annual Return / Investment) * 100%
  For example, APR for CAKE token is 50% in the Manual Cake pool of Pancakeswap yield farming. If I stake $1000 then I shall have 50% of $1000 = $500 as a reward.
  My total investment asset at the end of the year will be $1000+$500 = $1500

APY means the compounding interest. Here the reward of daily (if daily compounding) assets will be again used as investment for reward generation.

• APY Calculation System
  Lets consider Previous example again just changing the term APR into APY.
  Formula, FV = Invested Amount * {(1+r)^n-1}

Here rate, r = 50% = 0.5 yearly.
So daily r = 0.5/365 = 0.00136986

Time, n = 365 days

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So, according to formula,
FV = $1000 * [{(1+0.00136986)^365}-1]
= $1000 * {(1.00136986)^365 -1}
= $1000 * 0.64815725
= $648.16
Therefore, total return at the end of the year = $1000 + $648.16 = $1648.16

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Here you can see the difference between simple interest calculation and compounding interest calculation. With same rate, investment and time frame, one is $1500 and another is $1648.16. The difference $148.16 is the because of daily compounding.

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