What is the difference between APY and APR?
PreviousHow to resolve the "No wallet" error when connecting wallet to Saros FinanceNextHow to get farming pool Txid
Last updated
Last updated
You may have heard of APY (Annual Percentage Yield) and APR (Annual Percentage Rate), two of the most widely-recognized terms in crypto.
Both APY and APR are used to calculate interest on investment; however, having deep-understandings on how they work and differ from each other would significantly affect how much you will earn with your crypto assets.
Here is a cheat sheet about APY/APR and their main differences:
APY
Annual Percentage Yield
APR
Annual Percentage Rate
Definition
Annual rate of return considering compound interest
Annual rate of return without considering compound interest
Factors
Return depends on initial investment and number of compounding periods
Return depends on initial investment only
Figures
APY is higher due to compounding impacts
Without compounding impacts, APR is lower than APY
All these texts would be worthless without a good example. Let's say Clark has a good $1,000 initial investment. An investment product offered him 6% interest every 6-month.
Without compound impacts, the product's APR = 12% with a simple formula: 6% x 2 halves of the year = 12%. Clark will receive a nice $1,000 x 12% = $120 return for his investment with APR = 12%
With compound impacts, it gets trickier. For the first half of the year, Clark receives $1,000 x 6% = $60, which later gets reinvested, making the principal bigger at $1,060. At the end of the year, Clark receives $1,060 x 6% = $63.6. Totally, Clark’s annual return is $60 + $63.6 = $123.6. This amount constitutes an APY = 12.36% to the principal $1,000. An easier way to calculate APY is using the formula: APY = (1 + R/N)^N - 1 Whereas R is the annual rate of return, N is the number of compounding periods.
It can be clearly seen that APY is higher in comparison to APR due to compounding impacts.
It is noticeable that all Stake & Farm pools on Saros use APR as the main interest metrics.
Well, from our point of view, the simpler, the better. A display of extremely high APY can be a double-edged sword, giving a false assumption of the pool.
Simple rule: The more users stake their tokens in Farms, the lower the incentives will be, thus APR & APY will be lowered. The same principle applied to the other way around.
As the deposited amount changes from time to time, the APR will change accordingly.
Currently APRs on Saros are calculated based on standard EPOCH of Solana network. However, in reality, Solana blocks do not run exactly in rhythm with the standard. Instead, they usually run slower, which means that it will take longer to reach destined block of each farm/stake pool.
This explains why you feel like the actual reward being smaller than UI APR. In fact, the APR is still correct to Solana standard, but it will take a bit longer to reach full amount as Solana is running slower than the standard speed.
